Portfolio Trading, Breakdown of Liquidity Silos Among Credit-Trading Trends
Portfolio trading, the breaking down of liquidity silos, and more streamlined workflows on trading desks are among the biggest trends in credit trading, Tradeweb highlighted in a report.
Portfolio trading first gained real momentum in 2019, when it became possible to automate the most labor-intensive parts of packaging multiple bonds into a single basket for a trade. More than $60 billion in credit portfolio trades were executed on Tradeweb in the first half of that year, and 2020 saw much more rapid growth as the buy side sought new liquidity.
“It is clear the trend will continue,” the Tradeweb report stated. “While the rapid surge in portfolio trading was certainly accelerated by the pandemic, its staying power is being driven by the virtues of efficiency, cost and risk reduction.”
Regarding liquidity silos, market participants have found distinct advantages to scaling beyond the core trading relationships of the past, and expanding their liquidity pool.
“Electronic trading protocols have made it possible to safely tap new spigots of liquidity, creating an all-inclusive trading network that allows traders to maximize their reach and tailor their trading strategies based on which counterparties they want to target for each particular trade,” the report stated. “Ultimately, the trend that emerged during the pandemic—and has continued into 2021—is toward more customization of electronic trading strategies, with traders deploying a mix of anonymous, all-to-all blanket strategies and more targeted, relationship-driven strategies. The glue that makes both possible, of course, is the flexible electronic trading platform.”
Treasury spotting, a historically manual process to hedge interest rate risk of credit trades, is an example of how closer collaboration between previously siloed areas of institutional markets reduces inefficiencies in the administrative part of the trading workflow. “Thanks to new innovations in electronic trading, the process has been streamlined dramatically,” the Tradeweb report stated, by replacing the cumbersome process of manually spotting spread trades with one that enables credit trades to be hedged automatically based on real-time Treasury pricing.
“Incremental tweaks and improvements to existing trading workflows are making it possible for market participants to seamlessly collaborate and share information even more efficiently than they could when they were all working under the same roof,” the report stated. “While the technology became a lifeline in the work-from-home world of 2020, it is now proving itself as the new standard in workflow efficiency, regardless of whether credit and rates traders are back in the office or still working in their pajamas.”
Other trends Tradeweb highlighted are flexible automation, which manifested itself last year with a steady reliance on automated trading amid high volatility, and automated pricing capabilities that increase transparency and liquidity.
The credit market trends will continue, Tradeweb predicts. “The industry has a refreshingly simple litmus test for what gets adopted and what gets cast aside: does it help me do my job better and improve my bottom line? By that measure, the electronic enhancements to trading workflows that were adopted and used most vigorously during the chaos of 2020 have earned their place in the pantheon of credit market evolution by consistently adding value.”
Added the report: “As we head deeper into 2021, it has already become clear that many of these tools will continue to gain traction, proving their worth a little bit further with each new transaction.”
With Louise Drummond, Global Head of Investment Execution, Aberdeen Standard Investments
Corporate bond trading platform built on DLT will use Validus for surveillance and monitoring.
Tradeweb’s live prices for US corporate bonds will stream on Boerse Stuttgart’s bond order book.
Tradeweb's Iseult Conlin details a breakthrough in all-to-all trading.
New tool enhances how market participants access the U.S. Treasury market to hedge risk.