Adding value to new bond issues is a relationship business

Published on 1 February 2021

Deals have seen a lot of support from investors this year, giving a great start says Santino Bibbo, managing director of Cabrera Capital Markets. With around US$130 billion priced in investment grade US new issues over the past month, one new issue from retailer 7/Eleven being launched in Asia and being six times over subscribed by the time the deal reached the US that day, and US$6 billion of inflows into bond funds, the numbers support this.

Adding value to a deal requires his firm to reach out to the 400 investor accounts – including smaller firms by assets under management – and ensuring that the breadth of investors increases pricing and liquidity transparency in the deal. Strengthening relationships with large broker dealer firms and focusing on the capital structure of clients will be core to growth over the next 12 months, Bibbo explains.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. The skill of buy-side traders determines how well a portfolio managers’  investment ideas are expressed into the market. Mike Nappi, senior fixed income trader at Eaton Vance, is here to discuss how a trading desk efficiency affects investment returns. Mike, welcome to Trader TV.

Mike Nappi Thanks for having me, Dan.

Dan Barnes What are the pressures on the trading desk right now?

Mike Nappi So you have a few things. I think the one you hear about the most, the one that gets the most press is free trade transparency. And where is a bond going to trade when a trade hits a trader’s blotter, what level are we going to get done at. The trader decisions? Free trade, especially around how you’re going to trade it, can really impact price if you don’t choose the right method first. And that’s what we try to work on, is when to use a certain system. There is no one size fits all, like if we do it this way, we’re going to see everything, because you don’t want to be looking at 50 different screens. And that’s obviously, screen real estate is a big thing in this business. You want it as consolidated and aggregated as you can get, and that’s really the end goal, I think, for any trading desk. The other challenge right now is automation and how fast we can automate. I think a few years ago, this market was struggling with the idea, ‘can we trade electronically? Can fixed income go by way of equities?’ And I think the market’s proven that it can. And so we’re quickly in this mode where we say, ‘how fast can we automate some of this stuff? For certain trades, it’s not going to be all trades, but we’re in that early stage right now. You’re seeing a lot of third party vendors kind of grab that and run with it as well as what we’re doing internally.

Dan Barnes Have you actually developed a separation then between high touch and low touch trading?

Mike Nappi It’s not a hard line, there’s probably a soft line on our desk on how we do that. But I think it’s important that traders can do both and understand the differences. I think in order to be in an environment where you’re looking at low touch trades, if you’re going to be effective at it, you actually need to know how to look at it from a high touch standpoint. You don’t want to just put people in that can push buttons and understand how its system particularly works, because when something goes wrong, they don’t have that experience. It’s something we’ve thought about doing and it’s something every once in a while we take a look at. I think volumes dictate that and I think if you’re a low touch, volumes are so high, it may make sense. But at the same time, as someone who trades both for Eaton Vance, I like having access to both platforms and to be able to add what I learned from the high touch side over to the low touch side.

Dan Barnes So what are the stages in terms of developing that from high touch and low touch?

Mike Nappi You know, we really started our auto X efforts in tandem with some third party platforms about a year and a half ago. And we’ve watched those hit rates, our execution percentages steadily climb. it’s important for us to provide those folks feedback, so the system can get better, and it can become more exchange-like in a way. But we would start off with folks from our tech-side, making sure the technology plumbing is where it needs to be. You know, send a few messages back and forth, and then inevitably that first day we’re kind of live. Thefeedback we provide those third-party vendors is key. What they give us for tools is key. And nobody can really go at this alone, that’s the interesting thing about this business. You really need to partner with folks from the sell-side, the traditional banks, third-party platforms, order management systems to make this work. I know talking to other folks on the buy-side, that’s something that some folks haven’t turned on yet. So we’re early. We like to be early, especially on the technology side. I’d say over the last year it feels like the velocity has picked up as well. When you talk about where are we going to be in in three or five years, we’re further along right now than I would have thought if you asked me a year ago. And it’s funny in my 10-year trading career, for investment grade anyway, it’s been, the first 5 years was all about, can it electronically happen? And we’ve proven that pretty quickly. And now it’s, how much can we ramp this stuff up? And it seems every year it’s going faster and faster.

Dan Barnes So, you actually see these new protocols having an impact on investment returns, ultimately?

Mike Nappi Absolutely, and I think that’s what you want to happen. Any time you can free that traders’s time up to do things that are more value-add, it’s a huge win. And when we started electronically trading, you think about the behavioral changes that have happened in this business, particularly from the sell-side. 10 years ago, if you put out a list, an RFQ on one of the trading platforms, that maybe wasn’t frowned upon, but the sell-side seemed to want every trade to go through the traditional channels. Ticket counts go up and folks get inundated, especially with the smaller trades. And so I think the sell-side did a good job of quickly adapting to changes in market structure. And you see most of them now have either algo based pricing models, or some form of streaming, or some way to handle those lower touch trades. They also do a pretty good job of having their trading desk integrated with that process. And you just start to see ticket counts go up, not necessarily sizes of trades, in fact, I think the average ticket size, I think has come down if you look at the data.

Dan Barnes Yeah, that’s right.

Mike Nappi Which I think is a byproduct of this technology.

Dan Barnes That’s great. Mike, thank you very much.

Mike Nappi Thanks for having me, Dan.

Dan Barnes I’d like to thank Mike Nappi of Eaton Vance, and of course, you for watching. To catch our monthly reports on other markets, or to subscribe to our newsletter, go to TraderTV.NET.