Bond-Trading Platforms Assessed

Terry Flanagan

More than a dozen fixed income trading platforms exist today, and more are planning to launch in 2015, yet only a handful existed as recently as five years ago, said Mike Nappi, senior investment grade trader on Eaton Vance’s investment grade desk.

“Each one is a little different,” he said. “Some are dark pools, some use central limit order books, and still others are RFQ.”

While a shakeout appears inevitable at some point, different trading models can co-exist for a good long time. “It doesn’t make sense to have three dark pools that do the exact same thing,” said Nappi, “but to the degree those consolidate, dark-pool trading or some sort of a session-based all-to-all matching certainly can trade alongside with the RFQ model.”

The fixed income trading desk over which Nappi presides is in close proximity, literally, to the portfolio managers. “We’re on the trading desk in the center of the floor,” said Nappi. “Their offices are surrounding the desk. It’s not uncommon to see a PM there talking to a trader.”

Portfolio managers are very astute about the trading function, and will often consult with traders prior to their executing a trade.

“They’re not just saying, “I want to own this bond,” but checking up-front and asking, “Is this the one we want to own?”” Nappi said, “It’s not all about fundamentals. There are a lot of technical aspects that come into play when you’re picking out a bond, especially when you’re putting a new position on. Is this bond 50 (basis points) cheap? Why is that? Most of the time it’s because of the liquidity profile or technical with that bond. You’re getting paid extra to take that liquidity risk because you know if you need to get out, you’d probably have to give up a little bit of spread to the current benchmark.”

Even in an electronic trading environment, voice communications are still of the utmost importance.

“It’s not as if we are sitting on a desk just seeing electronic orders,” said Nappi. “The verbal dialogue is the beginning of it. Then those words get turned into an electronic trail as a PM would actually tee up the orders and then send them to the appropriate trader.”

The central limit order book functions like an equities exchange. “If I look at a particular bond and I pull it up, I’m going to see bids and offers stacked,” said Nappi. “I might see a par bid and a 101 offer. Then below that I’ll see a 99 bid and a 102 offer etc. And that inventory, I could buy right off the screen. I could also show liquidity or provide liquidity. Someone can respond to my market-making.”

Eaton Vance is live on multiple platforms. “Each one of those three is unique,” said Nappi. “There are days where a bond might trade only trade on one of the platforms we use.”

He added, “I’m an advocate of seeing the market continue to go this direction in terms of people willing to share ideas and contribute to more flow in the space,” said Nappi. “It will be interesting over the next few years to see how this pans out.”

Featured image via iStock

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