Trading credit: The evolution of trading protocols
Trade in credit markets has surged in the last two years, and nearly 50% of all investment grade credit was executed electronically. Where once driven by new regulation, the transition to electronic trades is now being fueled by the need for better pre-trade and post-trade information, the rise of algorithmic trading and the adoption of new trading protocols.
In the webinar, “Trading Credit: The Evolution of Trading Protocols, from Algo’s to Portfolio Trading and the Next Big Trends,” Bloomberg and Flow Traders teamed up to discuss the impact of a rise in electronic trading.
“In Europe, there certainly has been a significant uptake in electronic trading,” said Harry Street, head of European Credit in Bloomberg’s Electronic Trading Solutions group. Street says an estimated 75% of tickets are executed electronically and on platform.
Enhanced pre-trade data
“A key and consistent theme that we hear when engaging with the market is around data that is available in the pre-trade workflow that ultimately aids decision-making processes around execution,” Street said. He says market participants are using data for choice of protocol, to determine dealer selection when they enter the market and as a reference to aid decision making around execution.
In some cases, pricing data available pre-trade may even be used in transaction cost analysis and counterparty profiling. “So it’s an incredibly important part of the workflow, no matter which protocol is being used electronically,” Street explained.
Ramon Balje, Head of Fixed Income, EMEA, at Flow Traders, pointed out the enhanced transparency offered by quality pre-trade data and how that enables participants to make better decisions and more efficient executions. He proposed that, with transparency as an objective to MiFID II and MiFIR, more robust pre-trade data may be beneficial with the move to a consolidated tape.
Balje noted the ability to know who’s axed in liquid markets is an important factor driving efficient electronic execution.. Price streams, he said, are another important pre-trade tool that allow participants to optimize their trading strategies.
“There are many more measures and metrics that the buy-side are using and have now adopted in their pre-trade and dealer selection workflows” said Pierpaolo Albano, Bloomberg’s Head of Electronic Trading Solutions, Southern Europe, Nordics & Netherlands and Webinar host. These metrics included hit rates, average quote times, slippage and % priced and executed inside of a benchmark such as CBBT, to name a few.
Automated market making
“What we try to do is replicate the brain of a trader,” said Jasper Jansen, Head of Fixed Income Trading, EMEA, at Flow Traders, in speaking on algorithms developed for fixed income from a market-making perspective. In the same way a trader who needed to price a request for quote would assess the data necessary to price tickets, an automated pricing system would take into account numerous different data inputs to quickly compute an optimal price.
On the other side of the trade, Jansen says the impact to counterparties from algo trading comes in the form of cost savings. “In general, these algos do have a high market share. They do have a high hit rate,” he says. Instead of pricing bonds with multiple dealers, he says, a high volume can be priced with lower margins because only one desk is needed to operate the whole system.
Rise of portfolio trading
Portfolio trading (PT) was virtually nonexistent in Europe a few years ago but grew rapidly over the last two years, Balje said. In the US, where PT was already a well-known phenomenon, the volume of trades also expanded quickly. With this protocol now a significant part of trading in the total bond market, he said, the key benefits for investors are that they can, on average, get better pricing and certainty of execution
Balje says there are many reasons for the growing popularity of PT amongst counterparties including the ability to save participants a lot of time. PT may also be used because money flows in quickly and they want to put it to work or for month-end rebalances. Balje also sees opportunities for platforms to play a role in helping the buy-side, as investors may be able to use them to gain visibility into the PT axes that dealers have.
Street spoke of investors expanding their use cases for portfolio trading. Beyond investment grade, high yield and emerging markets, he said they’re looking at rates portfolios, and not just in single classes of assets. He says platforms that support multi-asset classes and multi-currencies are “extremely beneficial to a workflow that can easily become quite fragmented.”
“So I think two years ago, perhaps, it was a pure credit conversation around investment grade and then high yield,” Street said. Whereas today, he says, there’s expansion into other asset classes and commingling baskets.
Matheus Haserick-Lara, Head of Fixed Income Trading, Americas, at Flow Traders, said he thinks the adoption of PT will continue to expand because of the streamlined workflow it offers and the accompanying time savings. He says more robust portfolios are being created and that the future will bring a two-way dialogue between dealers or alternative liquidity providers and investors.