Tradeweb Europe Takes ‘Axe’ to Bond Market

Shanny Basar

In wood cutting, an axe cleaves. In bond markets, an axe can help connect.

Help connect buyers and sellers, that is. Enrico Bruni, managing director and head of Europe at Tradeweb, the electronic fixed income, derivatives and ETF trading platform, said that over the past 18 to 24 months the firm has focused on improving pre-trade information via its axe functionality.

Bruni told Markets Media that the conversion rate from buy-side enquiries to completed trades increases by 30% when a request-for-quote is sent to an axed dealer, so it is a very efficient mechanism of connecting liquidity seekers and providers. Axes highlight prices or indications from market-makers to buy or sell specific instruments and are integrated into Tradeweb’s platform to make trading more efficient.

“We’ve improved the way dealers send and distribute axes on our European credit platform, where approximately 7,000 axes are available at any given time,” he added.

Tradeweb said it is the only trading platform with real-time axes for European sovereign bonds, in addition to axes for European credit, covered bonds, and supranationals, agencies, and sovereigns. The firm’s data shows that when requests-for-quotes are sent to an axed liquidity provider there is an improvement in pricing, especially for government bond trades greater than €10m.

“We’ve enhanced the collection process and the quality of our pre-trade information, so we can help clients understand and use this data effectively for execution,” Bruni added. “Our list trading functionality, for example, improves the platform user experience by linking axe and price information.”

Bruni continued that Tradeweb has also been refining the characteristics of the RFQ protocol to increase its flexibility, and will continue to look at ways to expand it further. As the buy-side has been finding it harder to trade large blocks in fixed income, the number of tickets has increased as deal sizes have fallen.

“OMSX is a rules-based functionality that automates the execution workflow for smaller-sized trades, as the growth of passive investing has driven the number of buy-side tickets,” added Bruni. “The take up has been enthusiastic in Europe, with clients using the tool in double digits.”

The possibility that proposed European Union rules may further harm fixed income liquidity was highlighted in responses to the EU Commission last month as it reviews the regulatory framework for financial services in the region.

The Association for Financial Markets in Europe warned in its response to the consultation that policymakers need to consider the impact of new regulation on banks’ ability to provide services. “Regulatory reform – and in particular additional capital requirements – has already forced bank deleveraging resulting in a reduction in banks’ lending capacity and market-making capacity,” added the AFME. “For instance, European corporate bond trading volumes fell by up to 45% between 2010 and 2015, while dealer inventories have also declined significantly. Several major firms have also recently withdrawn from their primary dealer role in European sovereign bond markets.”

Enrico Bruni, Tradeweb Markets

Enrico Bruni, Tradeweb

MiFID II, the incoming regulation covering financial markets across asset classes, requires trades in liquid bonds to meet certain pre-trade and post-trade transparency requirements. The regulator has supported an instrument-by-instrument approach for defining bond liquidity and is trying to collect data in order to determine which bonds should be classed as liquid instruments. The legislation was due to come into effect at the beginning of 2017 but is being delayed to 2018.

Bruni said: “MiFID II engagement is higher than it has ever been, as the one-year delay has allowed clients more time to get a deeper understanding of the rules.”

MiFID II will also impose new requirements on firms to quantitatively evidence best execution across asset classes, including fixed income.

“We’re extremely well-placed to provide transaction cost analysis solutions, as we have a robust composite price across multiple asset classes. We’ve created tools to compare the trade price to the composite price, and how that changes over time,” Bruni said. “This is a key area of focus and our community is highly involved.”

A new regulation that will come into force in the European Union in June this year is the requirement to centrally clear certain interest rate swaps . Bruni expects the clearing mandate to boost volumes of electronic swap trading in Europe, but said the largest increase will come after the trading mandate is implemented in 2018.

Nearly 80% of European investors still prefer to trade interest rate derivatives over the telephone according to the recent Greenwich Associates 2015 European Fixed Income survey. The consultancy said only 20% of notional volume was executed electronically last year, and less than 40% of investors use electronic trading tools.

Bruni said: “There is more electronic trading of swaps in Europe today than in the pre-SEF era in the US. If our US experience is anything to go by, electronic volumes will grow substantially when the trading mandate comes into force.”

Mandated trading on swap execution facilities began in the US in 2013. Greenwich said electronic trading of interest rate derivatives by US investors was below the current European adoption at 15% of volume before the SEF mandate, but has since increased to three-fifths of volume being traded electronically. In the US average daily trading volumes on the Tradeweb SEF rose to more than $30bn last year.

Last September Japan became the first country in Asia to introduce mandatory electronic trading for specified over-the-counter derivatives and more than ¥2 trillion was traded electronically that month.

In addition to improving axes for bond trading, Tradeweb has been focused on axes for exchange-traded funds.

Bruni said: “A key theme for us has been to leverage technologies in other markets to improve ETF execution, such as axes functionality from our bond marketplace. In addition, we’ve made it possible to compare execution on Tradeweb with on-exchange transactions.”

Tradeweb said European ETF volume was more than €112bn on its platform in 2015, with fixed income products accounting for nearly one-third of the overall activity.

“Our ETF volumes have increased, as the market has grown in terms of assets under management and infrastructure,” added Bruni. “We trade a meaningful share of the electronic OTC ETF space, and our platform has seen more activity from existing clients, while also attracting new clients.”

Tradeweb launched an electronic venue for trading European-listed ETFs in 2012 as the fragmented market, with listings in different countries, has led to the majority of trading volume in the region being off-exchange. The firm launched an ETF trading platform in the US last month.

Approximately two-thirds of ETF trading in Europe is over-the-counter so it is difficult for participants to gather data and measure true liquidity. Last year Tradeweb introduced ETF trade data reports to increase transparency. In addition Tradeweb partnered with BlackRock and State Street to develop a consistent approach to calculating key metrics for fixed income ETFs.

“As part for our efforts to improve the ETF ecosystem, we’ve worked together with BlackRock, State Street and other market leaders to develop a standard methodology of calculating key metrics for fixed income ETFs,” said Bruni. “We’ve already launched yield and duration analytics on our platform, and we’ll be implementing spread metrics over the next few months.”

Featured image by dingelstaddalton/Dollar Photo Club

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