Buy-side trading skills make bond ETFs and mutual funds safer for investors

Published on 30 March 2020

The levels of volatility in markets are making it harder to price the underlying instruments in any fund. The buy-side trading desk is fundamental to supporting price formation and liquidity access. Optimally, it will allow the investor to sell/redeem a fund with minimal dislocation from the underlying instruments. Trader TV spoke to Deborah Fuhr, managing partner and co-founder of analyst firm ETFGI, about the effect that the liquidity crisis is having upon active and passive funds.

Dan Barnes Welcome to Trader TV – your insights into the trading climate for professional investors. I’m Dan Barnes, and with me is Deborah Fuhr, of ETFGI, to talk about some of the challenges around liquidity and pricing that fixed income funds are seeing stay in the market. Were investors potentially could see funds shutter, their choice now is not necessarily about making sure that investments are going up. It’s more about their ability to redeem themselves or redeem funds into a cash position. That seems to make the buy-side trading desk even more important as a composition of the overall investment process, perhaps, than it otherwise would be. Typically, it’s looking to improve prices because it actually directly impacts whether or not people can get out of a position entirely as an end investor. Do you think that’s a fair reflection of the importance today?

Deborah Fuhr I definitely think that liquidity is much more important today in the investments people are making and the desks are definitely looking at this, so I think performance is important, but they don’t want to get stuck into an investment, for fear that they won’t get out. So, I think that the ability to get in and out of investments is much higher ranked today than it has been historically.

Dan Barnes We’ve also seen a rise in portfolio trading. I mean, this can be used, of course, for active funds as much as it can passive funds, but it’s very interesting to see the capacity to trade an entire basket of securities becoming much more popular with funds. Have you seen increased interest in that as a trading protocol?

Deborah Fuhr It definitely has been. I think for a lot of people, what they want to be able to do is tell someone, ‘here’s what I want to get done.’ They can use the tools on the trading desk to help them figure out what is the best way to trade. So, should I be trading VWAP at the end of the day at the open. So really trying to understand the market impact they’re going to have, and the best way to go about trading.

Dan Barnes Do you see a point at which the prices for trading fixed income, particularly on the screen, are likely to better represent the price that asset managers can actually get when they pick up the phone and speak to their dealers?

Deborah Fuhr Well, I think as we see more people trading, that is going to facilitate the bond prices being not stale. We’ve seen the Fed announced that they’re going to be buying bonds, they’re also going to be buying some ETFs. So, as we know that there’s going to be more buying happening, it’ll make the prices more real time and more accurate. So, I think we’ll see less of a discount happening as the pricing improves. So, you want to see more frequent trading to be able to have good pricing.

Dan Barnes That’s absolutely true. It’s quite strange to have the central banks taking the place of market makers, doesn’t it? Do you think perhaps there might be some push back on the capital adequacy rules that are restricting the amounts of risk the broker/dealers can take today?

Deborah Fuhr I’m not sure. I mean, to be fair, we have seen that the Bank of Japan has been using ETFs exclusively for the best part of two years or more now. So, I think we have seen that happen in Japan. This is the first time we’ve seen it happen outside of Japan that I’m aware of. And I do think that right now, anything to make the market look better, I think is allowed. And maybe later they come back and reassess should they be changing any regulations. But I don’t think they’re going to be looking at changing regulations any time soon.

Dan Barnes Deborah, thank you. That’s fantastic.

Deborah Fuhr Thank you.