Analysis: How electronic bond trading has held up in 2020

Published on 6 October 2020

Volatile markets are seen as the natural home for voice traders, but 2020 has seen many electronic trading protocols thrive. Fixed income is still a very relationship-based business, but having the right level of automation and analytics on the trading function can support greater use of e-trading to generate alpha and to support human traders, particularly when navigating the opportunities provided by volatility.

Mikael Björkman, head of Execution for Fixed Income at Credit Suisse, analyses how to optimise the use of electronic trading on the buy-side desk, how to integrate high- and low-touch trading and the feedback that e-trading provides into performance measures.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Joining me today is Michael Bjorkman, head of execution for fixed income at Credit Suisse AG. Michael’s an expert in the fields of electronic trading and automation for buy-side trading desks. We’re going to be discussing how electronic trading has fared in the very volatile markets of 2020. Michael, welcome to Trader TV TV.

Michael Bjorkman Hey, thanks for having me.

Dan Barnes So this year’s markets have really tested price formation and liquidity in the fixed income space. Do you think that electronic trading has held up under the pressure?

Michael Bjorkman Yeah, it was very challenging. We had to roll up our sleeves and call in the reserves to get the job done. Looking back, I think electronic trading held up pretty well. It could still provide value in these times, but definitely not the prime habitat for the automation, these markets.

Dan Barnes Do you think that is becoming more viable in choppy markets than it used to be when people just picked up phones?

Michael Bjorkman I think so, with the support of data and liquidity provision by technically advanced counterparties, I see future generations of automated trading being able to handle this better and better as you add intelligence to those systems.

Michael Bjorkman Could you describe how you apply automation and electronification on your trading desks? Because clearly there is fully automated trading, but then there’s also automation of parts of the trading workflow?

Michael Bjorkman Basically, it’s about aggregating liquidity from relevant liquidity providers across multiple venues. Then you create an aggregated view of those data sets. And on that data, you basically make the decision what to do with every trade. It’s also about making the automation fit well with high touch trading. How can they complement each other, because they both have their own strengths?

Dan Barnes Absolutely. So that’s how automation and electrification work on the trading desk. What advantages do they confer, particularly in fast markets?

Michael Bjorkman Fast markets are a very challenging environment to begin with for automated trading. Nevertheless, you can still use the automation to collect a lot of insight about the market. And that is the main thing, except for obviously relieving the trading desk so they can focus on the trickier orders. But the high touch trader and the intelligence that is being created by the automation, that makes a very strong combination.

Dan Barnes Well, it’s interesting because people often think about automation of the processes that the trader would be doing in terms of going out to the market. But, of course, there’s a lot of information that’s being fed back to the traders that they have to process. Doing that manually is very time consuming and slow.

Michael Bjorkman And it’s more or less impossible to grasp everything. This is why you work on an aggregate view, which you constantly enrich with new data sources and new analytics, etc., to provide automation with the means to decide where to go as well as the human trader.

Dan Barnes Are there any particular trading protocols which you see maturing this year?

Michael Bjorkman The ones creating most buzz are all-to-all based protocols, but also direct connectivity. It’s basically about being able to interact and reach liquidity, whatever it is. At the same time, you also want to strengthen relationships with the key liquidity providers.

Dan Barnes What do you think are the top lessons we’ve learned about e-trading this year?

Michael Bjorkman Definitely the relevance of market data. We could not trust a lot of the data products that we normally would rely on. We would have to basically create our own image by going out in the market. I think that’s also a lot of lessons coming from those data providers, meaning that they will need to tie those data products into the actual trading activity, so to speak, to reflect the market levels. One of the things where we touched on briefly before is the correlation between technically advanced counterparties and their ability to provide liquidity and not just looking at technical things. The lesson learned is also about having an experienced trading desk, which is able to cope with all these challenges, using their experience, using their networks and the relationships, etc… I would say that is the main thing; we realized that fixed income is still a relationship-based business.

Dan Barnes And do you see any quantifiable performance improvements that actually support end investors ultimately. Are they benefiting from the advanced approach that your team takes?

Michael Bjorkman Definitely. We measure this continuously and we see that our automated trading is performing very well in this regard. It’s generating a lot of alpha. It is also generating alpha indirectly by relieving the high touch traders from those easy tickets so they can focus on those trickier tickets.

Michael Bjorkman Do you separate high touch traders and low touch traders, or do traders have access to both types of protocols?

Michael Bjorkman We strive to integrate both. I don’t see the automation as a separate thing. I see it as more or less as a trader on my desk. And I want the automation to support our traders manual trading as well as I want that experience and intuition and observations from my traders to be factored in to do the automation.

Dan Barnes We’re seeing the level of electronic trading increase, according to various research analysts such as Greenwich Associates. Do you think that the pace of change has potentially increased?

Michael Bjorkman Yeah, so it has accelerated over the last few years, definitely. First of all the availability of data, there is the supply of various tool sets and technologies from vendors and platforms. There’s the awareness that this can bring a lot of value to the clients in the end to invest in technology. So, yes, definitely, the race is on in the sense

Dan Barnes That’s been great. Michael, thank you.

Michael Bjorkman Thanks. Thanks for having me. It was a pleasure.

Dan Barnes I’d like to thank Michael for his insights and, of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TraderTV.NET or ETFTV.NET.