Convergence in Fixed Income Trading

Terry Flanagan

Electronic trading continues to make inroads in corporate bonds, but participants and platform operators say the market will always be more than point-and-click.

Accordingly, raising the bar on trading-desk operations entails working with this reality — making the existing process more efficient, rather than pushing to change the process.

“Credit is still a relationship-driven market,” Chris Bruner, head of U.S. credit product at Tradeweb, said Tuesday at Tabb’s Fixed Income 2018 event.

Exchange-traded funds have grown rapidly in fixed income, but they typically trade via the longstanding request for quote (RFQ) protocol. Central limit order books have a role in the institutional marketplace by offering immediacy and transparency, but it’s unclear when, if ever, CLOBs will supplant picking up the phone to buy or sell a block of bonds.

Platform operators and service providers can help the buy side by deploying existing technologies to more of the trading workflow. Bruner gave the example of more efficient processing for voice trades of investment grade bonds.

“We can continue to automate workflow, and expand the ‘decision tree’ by deploying more tools that are useful for the buy side,” Bruner said.

Bruner spoke on a panel about marketplace convergence, which covered how fixed income  managers can use cash, OTC derivatives, and ETFs to generate alpha (excess return) and manage beta (market return).

Tom Farina, co-head of U.S. Credit at Deutsche Asset Management, noted the buy-side front office is much more transparent than it used to be, which is helpful because “we don’t need to rely on multiple conversations with multiple traders” for most price indications. However, transparency is best increased slowly and incrementally, as too much transparency can impair market liquidity.

More broadly, buy-side institutions continue to be squeezed on margin, Farina said, so their primary need is efficiency and scale, from the trading desk all the way up to the enterprise level.

With regard to technological advances, BlackRock’s Matthew Tucker said innovation is helping all market participants. Larger investment managers can potentially differentiate themselves because they have the budget to invest in technology and can better harness the reams of data that flow through trading desks on a daily basis.

“It’s less about the information from the marketplace, and more about how to utilize the information from the marketplace,” said Tucker, who is head of Americas systematic fixed income strategy for the world’s largest asset manager.

Five years out, Tucker expects consolidation in the trading-platform space to result in fewer operators offering more trading protocols.

On the same question, David Parker, head of sales at MTS Markets International, expects more algorithmic trading in fixed income in 2023; Farina of DAM expects more efficiency in the new-issue market.

In addition to bigger and better decision trees for traders, Tradeweb’s Bruner expects the trading-desk mindset to shift from the explicit price of a security, to the price of the risk of taking on or offloading a position.

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