06.19.2019
By Terry Flanagan

#FILS Wednesday Recap

Some highlights from the Wednesday program at the Fixed Income Leaders Summit in Philadelphia:

Partners Needed

Sell-side banks and the biggest electronic trading platforms remain essential partners for institutional fixed income investors, as buy-side efforts to unilaterally boost liquidity have had limited impact.

That’s according to Dan Veiner, Global Head of Fixed Income Trading at BlackRock.

Speaking Wednesday morning at the in Philadelphia, Veiner said about 70% of BlackRock’s trades are electronically processed, though that represents only 20-30% of the firm’s risk.

Dan Veiner, BlackRock

BlackRock taps big banks for balance sheet, research, risk transformation, and big trades. “The sell side is still extremely relevant for us, not just as liquidity providers, but as partners,” Veiner said.  

BlackRock’s linkages to the large established trading platforms are similarly sticky. “Those relationships have become increasingly meaningful,” he said.

The largest request for quote (RFQ) trading platforms help the buy side streamline workflow and scale operations via high-throughput efficiency. This is critical for BlackRock, which has $6.5 trillion in assets and plans for $10 trillion, according to Veiner.

More than half of BlackRock’s trade tickets are generated auto-execution via RFQ trading platforms. “We would have to hire an army of traders” if the platforms went away, Veiner said.

The buy side has attempted to boost fixed income liquidity via standardization, optimizing trading protocols, increasing balance sheet, and increasing the number of liquidity providers, Veiner said. Each initiative may have helped at the margin, but institutions still need help to trade.

Buy-Side Tech

Jim Switzer, AB

At least to a certain extent, buy-side institutions can help themselves trade better via improving in-house technology.

At $555 billion asset manager AllianceBernstein, its Abbie chat bot helps with idea generation, and then its ALFA data aggregation and market surveillance tool assesses the liquidity picture for an indicated trade.

Leveraging trading technology to optimize trading processes is about getting people throughout the organization to buy in that there are different ways of doing things, said Jim Switzer, Head of Credit Trading at AB.

With regard to recruitment of personnel to the trading desk, Switzer said AB looks for analytical skills, the ability to write code or at least understand what code can do, and most importantly, the “ability to influence the investment process.”

Optionality

Liz Kirby, Tradeweb

Trading-platform operators are building out their product suites in step with the evolution of fixed income markets. 

Liz Kirby, Head of U.S. Rates Strategy at Tradeweb, said her firm’s focus is two-fold: automation and optionality.  The latter is about aligning with market participants’ needs and enabling buy side to trade in different ways.

Chris Concannon, Chief Operating Officer at MarketAxess, likened fixed income to a “blank slate” in the early stages of automation., and optionality of trading protocol will be a key factor going forward.

Concannon cited two initiatives that can boost buy-side trading efficiency. One is having the flexibility to choose a liquid bond that has the approximate desired characteristics, rather than homing in on a specific bond and hoping to find liquidity therein.

Chris Concannon, MarketAxess

The other idea is for the buy side to move from holding a ‘resting’ order on its own desk before pushing into the market, to resting the order on a venue with a price shown, at least for part of the order. Concannon noted other markets such as equities and futures work this way.  

“I think it’s coming to fixed income,” Concannon said. “At some point the buy side will place an order where the market will see it, and establish a price.”

Portfolio Trading

According to a #FILS survey conducted during a panel session, about one-third of institutional fixed income market participants use portfolio trading. That number can be expected to increase, based on indications from panelists and conference delegates who are warming up to the concept. 

Portfolio trading entails buying or selling large, customizable baskets of securities, rather than transacting one security at a time. 

If done right, the advantage of portfolio trading is obvious — it enables the buy side to effect a substantial transfer of risk in one shot. But the strategy is complex, and while it offers breadth of liquidity, it does not offer depth of liquidity, one FILS panelist said.  

Portfolio trading represents about 26% of AllianceBernstein’s notional trading volume, up from zero a couple years ago, Switzer said. Borne from the blueprint of passive ETFs, portfolio trading enables AB to more easily move between cash and synthetic, and/or change the liquidity profile of a portfolio as needed, Switzer added. 

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