Chris Bruner of Tradeweb gives us a snapshot of market evolution towards automated trading in the corporate bond space.
From new trading protocols to enhanced data access, buy- and sell-side firms with the right skills and tools can automate parts or all of their trading workflow in 2022, bifurcating larger risk trading from more electronic execution.
However, the distribution of this is not even and Bruner picks out where traders are likely to get most value from automation, and what they need to do so.
Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors. I am Dan Barnes. Buy-side trading desks risk being outpaced by the speed of change of trading protocols and new trading services. Joining me today is Chris Bruner, Head of Institutional Fixed Income at Tradeweb, and we’re going to talk about what’s changing, why it’s changing so fast and how buy-side firms can keep on top of it.
So, Chris, welcome back to the show.
Chris Bruner: Hi, Dan, nice to be with you again.
Dan Barnes: Tell us what is driving the acceleration of change in terms of the choice that credit traders have today?
Chris Bruner: We think we’re witnessing a bit of a virtuous circle around a complete workflow and the components of a complete workflow being delivered for the client base across all of their electronic trading needs, as well as their traditional voice needs. You’ll see that partly in new protocols like portfolio trading coming out in the last couple of years, but it’s really also making sure the technology works efficiently across all these different protocols, and they can leverage their whole workflow into a platform and into their own systems to greatly enhance their own trading and their overall trading process.
Dan Barnes: What’s been the impact of innovative new protocols on trade execution choice?
Chris Bruner: What we’ve seen specific to the credit workflow is a real shift in sort of the bookends. What used to be partially automated is now fully automated. So fx if you used to trade RFQs on a list, and that greatly increased the capacity and efficiency of being able to trade smaller size and a lot more liquid bonds. People want that to be fully automated now. And on the other end of the electronic workflow, something like portfolio trading is allowing you to trade much larger sized trades electronically, and customize the risk you want to move, and very quickly and efficiently, execute them at very quality prices.
And so that’s one thing we’ve seen in the workflow is being able to basically bifurcate and fully automate as well as be able to trade larger risk. And really, what that opens up for the clients is their ability to focus on their traditional voice business. That’s still a very important part of their overall business. As well as additional change that we expect to see in the space, fx around electronified and bilateral trading and parts of that voice business.
Dan Barnes: Where do you see this going in 2022?
Chris Bruner: We see ourselves in the early to middle of this trend, so I think a lot of clients were early in their adoption. There was a lot of other clients who are newer to understand what their peers are doing and then take advantage of some of these new workflow capabilities. So we see most of 2020 to it’s going to be around the continued evolution in both high grade and high yield, high yield in particular. I think we’ve seen a real acceleration from a tool like portfolio trading, being able to move customers risk in a significant manner.
Chris Bruner: And so that’s really helped us move our platform forward. We spent a long time building out a liquidity pool and then layering on portfolio trading as a protocol. I think it has really cemented our place within the high yield market and we see a lot of opportunity still in high yield in 2022.
There’s also going to be some additional themes. There’s more of the market to change and electronify around pricing and data aggregation and then execution around that data aggregation.
Dan Barnes: And are there regional differences in the level of progress?
Chris Bruner: There are and historically there have been quite significant regional differences. This cross-pollination, I feel like, has always occurred. Fx our all-the-all platform was rolled out in the US first and then moved towards Europe into a global basis. Portfolio trading was a little earlier, but was very much kind of a global initiative from the start. Sessions trading is another example that probably was earlier for Tradeweb in Europe, but now has become a huge presence in the US and is multiasset.
And so we get this cross-pollination through time and we don’t always get the timing right. Like we might think we have the timing right, but then it doesn’t quite hit. And then you come back a year or two later, and all of a sudden it feels like the market’s ready for something. And so we’re looking at, fx a lot of the capabilities that Europe has had around dealer selection, axe distribution, and we think the US might actually be ready for that in some sense in 2022, and looking forward. So that’s something we’re looking at quite heavily.
Dan Barnes: Do you think there is a risk of firms being left out and not engaging in this early?
Chris Bruner: I think there is a risk, but I also think the market, you know, arguably may never have been healthier because of that variety that we’re seeing. And I feel like those pressures have been overall a benefit for the clients. If you look back a number of years, there weren’t as many newer participants in the credit market, and some of those newer participants have really reshaped business models that have flowed back into the older organizations. And I think in quite a healthy way and upgraded their skills, their capabilities, their ability to provide customized liquidity to clients.
I think everyone faces a need to assess and adapt quite quickly. There’s a lot of tools available not just for the buy-side, but also for, you know, liquidity providers in our market pricing services, real time, intra-day pricing services that can get you close to where the market context is, provide everybody a basis or a basis function to provide liquidity and then also extract liquidity that I think can increase velocity. And I think there’s other tools as well. There’s workflow tools. There’s a number of different technology applications to help markets and participants as this change occurs.
Dan Barnes: On that point about pricing, do you think pricing is materially improving as a result of these innovations and is the ability to work around building prices improving?
Chris Bruner: I do think it’s materially improved. I think there’s still more good work to be done. We always like to say that, certainly within credit, pricing isn’t about being perfect, it’s about providing a really strong context, because people still have to form their own price that they trade. And that’s a very specific consideration to what they’re trading and timing and market conditions. And so our focus has always been to provide a really strong context within a few basis points or within, say, 25 to 50 cents in high yield bonds, but have really wide coverage.
So that’s what enables the virtuous circle that we started this discussion with, because then you can do better TCA, you can do better at automated RFQ execution. You can have better portfolio trading analytics as a function of having broad coverage and high quality pricing, which is slightly different than trying to say this is the price that something should trade.
Dan Barnes: And then finally, do you think the pace of change is potentially testing the abilities of trading desks?
Chris Bruner: I think it really is. We’ve seen an acceleration in the overall electronic trading activity for a number of years now, but the pace of change has been quite rapid in the last couple of years. And a couple of the themes that we see, our desks are working very hard to understand what skill sets they’re going to need, what technology they’re going to need to deploy and just how much they need to invest to compete.
You know, portfolio trading is maybe the primary example we talk about a lot. A lot of the earlier providers are seeing a ton of that activity, but a lot of newer entrants want to make sure they participate because it’s such a valuable part of the activity that’s going on in the credit space and it is expected to continue growing.
And more broadly than just the portfolio trading protocol, I think there’s a real shift on how do you manage your balance sheet? How do you distribute your balance sheet that feeds into each of these protocols we just talked about. So fx electronic access distribution could be happening off the back of portfolios. Portfolio risk could be distributed through your voice sales force.
If you roll back three to five years, I think people are trying to figure out which direction would they invest in what’s going to work. So maybe there’s a positive in that it feels like some of these trends and the visibility on these trends is maybe a little better or a little higher than it was. But there’s still a huge amount of change. And I do think each participant, each desk, each buy-side and sell-side organization is going through quite a massive undertaking to figure out what their strategy will be, and how to sort of reshape and redeploy their investments in the next couple of years around this change.
Dan Barnes: Chris, that’s been great. Thank you very much.
Chris Bruner: Thanks, Dan. Nice to be with you.
Dan Barnes: I’d like to thank Chris for his insights today and of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.