There is growing uncertainty across the global order and trade relations, and traders are operating in unpredictable markets and face relentless headline risks. But have we reached a crisis point?
Lee Sanders, head of execution at AXA Investment Managers (IM), discusses whether desks are facing down a crisis and looks at how his fixed-income desk adapts its execution and data capabilities in stressed Vs. calm markets.
Sanders also discusses how the firm is building out its execution and data analytics capabilities—including its low and high-touch functions—and where he sees innovations in data and artificial intelligence (AI) playing a role.
Interview
Jo Gallagher Welcome to Trader TV This Week, where headline risks and a rapidly changing political landscape are challenging trading desks. I’m Jo Gallagher and here to discuss how managing your execution strategy and data analytics can help with these challenges is Lee Sanders at AXA Investment Managers. Lee, welcome to the show.
Lee Sanders Thanks, Jo, nice to see you again.
Jo Gallagher How do you adapt your fixed-income execution strategy in times of market shocks and are we facing down a crisis right now?
Lee Sanders I don’t think we are currently in a crisis for markets. I think we are definitely in a crisis for the world a little bit with tariffs and all of the news that’s coming out of the new administration in the US. But I think in the normal course of events and our normal trading day, we have plenty of time to analyze axes and data and look at where we’ve traded historically. And at the moment, we still have all of the time to do that, to work high-touch orders or larger, more complex trades.
A market crisis, in my opinion, is normally when investors all try to de-risk at the same time. Let’s look at the LDI (Liability-driven investment) crisis, where the GILT (UK government bonds) moves, post the mini-budget, led to large collateral calls on leveraged LDI positions and credit had to be sold to facilitate the collateral calls. It was clearly a crisis and we had to work quickly and we were less focused on transaction cost analysis (TCA) but more focused on certainty of execution to raise the funds needed for our clients. And I think given these last few weeks, we definitely haven’t had that environment.
In times of crisis, we work with our fund managers, the solutions guys, the CIO, to determine the best outcome for the client. The real decision when liquidating portfolios in a time of crisis is, should it be line-by-line, portfolio trade or list? And if it’s line by line, do we take on more uncertainty given the cost against the instantaneous risk cost if the market moves against us? And I think finally electronic trading platforms such as MarketAxess have definitely improved in times of crisis. And I think from crisis to crisis, electronic trading capability gets a lot better as it’s hardwired into our toolkit.
Jo Gallagher How important is data, whether it’s pricing data or TCA data, in a market crisis?
Lee Sanders Yeah, all data is very important, Jo. I often talk about the data hybrid model. Axa IM’s proprietary data is very important to me as it’s where we’ve traded and we’ve been given liquidity at the best price. But data supplied by Trax, Neptune and other providers is also important. And in calm markets, we use the internal and external data and the expertise of our traders in a hybrid model.
TCA data is very important, but in aggregate mainly for me, it shows the value add of trading post-crisis, or even in the normal course of events. This is to validate how risk has been managed by the trading desk and the implied cost and what the actual saving has been. I think in a crisis, the data value diminishes somewhat, unless it’s data taken from a crisis event. You really have to engage with the street to see who is short, long, and who has the appetite and what the costs are likely to be. And it’s not really until post-trade that you can truly assess that cost.
Going forward, our own systems will develop more and more in this space and the capability of the ECNs (electronic communications networks), which we’ve seen recently with the evolution of MarketAxess targeted RFQ (request for quote). This should show us what the cost is likely to be in calm, stressed, or extremely stressed markets going forward.
Jo Gallagher And how should a trader’s real value performance be measured in these kinds of circumstances in your opinion? And what are some of the challenges involved in doing that?
Lee Sanders I don’t think I’m in favour of taking aside traders to go through individual TCA line by line in normal markets or stressed markets, but it’s a great tool to look at an aggregated assessment of how we manage the risks. Some traders have a very difficult trading role, more complex than illiquid assets. I mean, how can you compare a trader of EM (emerging market) debt to a trader in rates? It’s just not consistent.
I think more importantly to me, I like to see traders working very closely with FMs (fund managers) and analysts discussing liquidity. and offering the most efficient alternatives, as well as bringing a filtered market commentary to the table and advice. And I think I tend to look at the aggregate asset class TCA and focus on why did execution get more expensive? And it’s definitely something post the LDI crisis we looked at. And we’re seeing that at the moment, we’re seeing the cost of execution go up a little bit, bid-offer spread widening and the savings captured diminishing slightly.
Jo Gallagher How is AXA Investment Managers building out it’s own data analytics and execution capabilities for voice and electronic trading?
Lee Sanders We have a high-touch and a low-touch trading capability. AXA IM are very much in the development space for both of them, but they complement each other perfectly. If we’re analyzing data in the high-touch world, it’s consistent for the low-touch world and should be used essentially in the same way, but just calibrated for a smaller size. We’ve developed our own proprietary EMS (execution management system) system called Atlas.
We’re working on AI to identify the best outcomes for the data. There’s a lot more work to do before it becomes truly effective. but we’re definitely on the road and the low touch desk is on the road on how they’re developing one or no-touch capability for smaller liquid tickets.
I think the ECNs are on this space as well and they’re catching up quickly with the recent release of MarketAxess’s targeted RFQ. Clearly using data more efficiently to narrow down the inquiry base to those liquidity providers that are most likely to win the trade and for the best outcome for our clients and this will clearly develop further. But whether it’s voice. or electronically traded. for me, it’s all about the data and experience. And this hybrid continues to be at the heart of every buy-side trading desk and I think it should be the main project for all of us going forward.
Jo Gallagher Thank you Lee for your insight, and of course you for watching. This has been Trader TV This Week.
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