Fixed income ETF trading is boosted by cross-asset expertise

Published on 1 March 2022

Buy-side trading desks are finding they are able to use ETFs in more dynamic ways as fixed income market makers increasingly support the use of exchange traded funds (ETFs) as well as cash bonds, loans and derivatives.

Access is further supported on trading platforms as list trading, portfolio trading and pre-trade transparency allow traders to narrow down potential liquidity providers, delivering a more efficient liquidity and price formation process, and ultimately better execution for traders.

Adam Gould, global head of equities at Tradeweb, says the firm’s experience across equity and debt markets creates a solution that is greater than the sum of the parts, allowing the end users to benefit.

Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors. I’m Dan Barnes. The use of exchange traded funds by institutional investors has grown enormously over the past decade. The way they use them has changed as well.

Joining me today is Adam Gould, managing director and global head of equities at Tradeweb. We’re going to be talking about how the buy-side are using ETFs, and how the sell-side is supporting them, and how Tradeweb works in the middle to help both parties.

Adam, welcome to the show.

Adam Gould: Hey, Dan, thank you for having me. Great seeing you.

Dan Barnes: So first of all, how would you characterize ETF activity onTtradeweb in 2021?

Adam Gould: 2021 was another extremely strong year for ETF growth on Tradeweb. Globally, we executed north of 900 billion, which was up 30% from 2020, and 2020 was a record year. Specifically, in the US, our volumes were north of 300 billion, which was a 63% increase from the prior year. And what was really interesting was the breadth of clients that we saw, lots of new clients with different profiles continuing to embrace the ETF wrapper.

Dan Barnes: What sort of trading activity are you seeing around fixed income ETFs?

Adam Gould: One of the trends we noticed really hit its tipping point this year was an evolution in the infrastructure of who’s making markets in these fixed income ETFs. Five years ago, via the platform, a credit ETF would come over to the ETF desk, which may have been on the equity floor at a bank or a market maker. Now that’s going to the credit market maker. We’re seeing the same people get set up to do that kind of thing with Treasury ETFs. So not only does that allow for better pricing, but it also allows for comfortable interaction with the fixed income traders and salespeople that typically cover these clients, trading the ETFs.

It seems like ETFs are now a core tool in a number of different capacities for most fixed income money managers, so clients are certainly using them for cash acquisition, they’re using them to express short term tactical views. They may be using them for tax management purposes as a way to hedge a portfolio. When we talk to clients now, whereas some may have been using them and some not, almost all of them now are using them in some capacity or at least getting set up and planning to use them.

Dan Barnes: So with this activity in mind, what kind of features have you seen clients asking for?

Adam Gould: I think the trends that we’ve seen for years now in terms of straight through processing, fewer clicks, those kinds of things, so they may be more tactical in nature. Things that we did last year as an example, increasing the number of ETFs that can be sent over in a trade, making sure that the right number is available in a portfolio trade, if clients want these things priced out as packages. We see clients asking for pre-trade transparency, So they can figure out if they are including the right dealers without having to run a bunch of data on their end? They want to see that available on the Tradeweb interface. So things like that that meet client needs, they’re not necessarily revolutionary, but they really sort of add to a streamlined trading process and better execution.

Dan Barnes: Can you tell us how those features tie in to increasing efficiency in the trading process?

Adam Gould: Yes. So I think about it in an RFQ 2.0 sense. So if a client thought, OK, RFQ makes sense, we’re going to get a very strong, aggregated bidding offer. As the number of liquidity providers has expanded, are we including the right dealers in our RFQs? As an example, we will take all of the trades that a client does with a set of metrics that they’ve asked us to include. And then we will essentially update that real time, display it on the order ticket and in some cases, if they want, have a preset dealer group, so they don’t even need to click anything, right? So they’re going out to the right liquidity providers based on real data, whereas in the past, if they were on phones or chats, doing that electronically was a big move forward in efficiency. Now, like I said in this version, right, it’s how do we minimize the clicks? How do we use data to make sure we’re including the right liquidity providers, that kind of thing.

Dan Barnes: So Tradeweb has a lot of experience across different asset classes and also in using different trading protocols. What difference does that make for you when you’re trying to expand in the exchange traded fund business? And what difference do you think it makes for your clients?

Adam Gould: Tradeweb is now active all across fixed income. We’re active in ETFs. We’re active in other equity products. I know when I was an equity trader on the buy-side, I was very unfamiliar with fixed income trading protocols, and I think lots of these protocols may make sense on the equity side or on the fixed income side, but the sum may actually be greater than the parts. So one of the things that we’re focused on as we get more experience in different markets, is to try and see kind of what works really well across both, and can we make the leap with one into the other?

Dan Barnes: Historically I understand that ETFs may have been traded typically by the equity trading desk rather than necessarily the fixed income desk. But that seems to have changed now, so fixed income traders were able to use both instruments; cash, bonds and maybe derivatives and also exchange traded funds, as well, is that right?

Adam Gould: Yeah. So I think as the sell-side has gotten more sophisticated with managing risk and the buy-side has embraced ETFs more, having those managed in the same risk book really makes sense. There are still some sort of learning curve and operational issues in that an ETF looks, feels and settles like a stock. It needs to get printed in a certain way, etc.. But the banks and market makers are certainly up that curve now, and it’s allowed them, at the end of the day, to manage risk efficiently and provide the end user with a better price.

In Europe, we’ve seen traders trade products across asset classes, equity, fixed income, options, different products. In the US, it’s always been more fragmented. I think now the buy-side is kind of being asked to do more with less. They are also being given, in a sense, technology tools that may make it easier to trade all these products, so we’re trying to work with them and meet that demand.

Dan Barnes: What are your expectations for growth in this market then, and what trends do you expect to see going forward in 2022?

Adam Gould: We continue to see, of course, more clients utilizing the ETF wrapper. Other things that are going on in the industry, such as conversions from mutual funds to ETFs by huge, huge fund companies. They don’t make these decisions lightly. So certainly they’ve also come to the conclusion that the ETF wrapper in many instances is the wrapper that money managers want. So on a micro level, the pipeline of Tradeweb clients that are getting set up to trade ETFs, we’re certainly optimistic. And then on a macro level, in the space, ETF assets are continuing to grow and mutual funds converting to ETFs, all sorts of new ETF fund launches that some are doing really well out of the gate. I think everything is lined up for continued growth.

Dan Barnes: Adam, that has be great. Thank you so much.

Adam Gould: Thank you so much, Dan. Really enjoyed it.