Markets could be in store for a strong week following the Federal Reserve’s, deeper-than-expect, interest cut of 50bps, on September 18, in addition to the healthy issuance pipeline for the rest of the year, says Sven Rudolf, head of trading at ODDO BHF Asset Management.
In this episode, Rudolf discusses why it’s an important week for data, whether it’s the right time to put cash to work, and why he’s paying close attention to the new issue calendar.
The head of trading also provides insights into the breakdown of ODDO BHF AM’s electronic and voice trading strategy and why he thinks that automation has its limits.
Rudolf additionally unpacks how his buy-side firm is using real-time analytics; how it approaches transaction cost analysis and what stage the industry is at in being able to feed these types of data into the execution process using automation.
Interview Transcript
Jo Gallagher Welcome to Trader TV This Week, your insight and trading desk for the week ahead. I’m Jo Gallagher. Today I’m joined by Sven Rudolf ODDO BHF Asset Management to discuss the main topics and events leading this week. Sven, welcome to the show.
Sven Rudolf Thank you, Jo.
Jo Gallagher Start us off. What’s in store for markets this week and what will be informing your trading decisions?
Sven Rudolf We had a very strong close on Friday and credit derivative indices. They were rolling and the news here and also trading on the tight side. Before this, we had this strong FOMC on Wednesday with 50 bps and the rates cut were slightly more than everybody was expecting, which leaves a strong signal for the market, with also a strong comment on the economy for the US. We’re seeing buying on Thursday and Friday and this.
So we are expecting a strong week coming. We are looking for confirmation of this strong sentiment with Eco data; Monday PMI data, all over the world. Tuesday, also data from the IFO index for Germany, and on Friday we will see the University of Michigan sentiment. So this week we try to take a look at the new issue pipeline again. The new issue pipeline is very strong this year from the non-financial issuance we had so far, 330 billion. That’s a lot. It will be perhaps a record year again because 2020 it was in total 390 billion. With 330 now we are trying to top it this year. So we try to take opportunity in this, given the secondary is getting very expensive. We’re hoping that we are getting a new issue pipeline this week, a good opportunity to put cash to work and to get a nice premium in comparison to the secondary market.
Jo Gallagher With those conditions in mind, give us a breakdown of your electronic and voice trading strategy.
Sven Rudolf Yes, we have already been early adopters to electronic trading. I think the European guys are more into RFQs and electronic trading than the US guys. I think there’s a difference. So for the government space, for example. They’re running a very high rate of automation and electronic trading close to 90%. Only the ** one trades are done manually. In IG, it gets a little bit lower, so we have to get two-thirds to 80% electronic and then high yield, it goes to a 50/50 balance depending on the name, ticket size, market structure, liquid, non-liquid, and high yield space where it’s still useful to talk to the right people and to make sure there’s not so much noise on the electronic platforms.
There we prefer to talk to traders to get good execution. It’s very important that you don’t lose touch to the market and the people. It’s still a people’s business. So we are currently concentrating more on the quality of automation than on quantity because we have reached a reasonable level of automation so far already, and that mix is currently working well for us.
Jo Gallagher One of the hot topics at Trade Tech FX last week was the use of real-time like performance for pre-trade. What stage is your firm in being able to leverage that?
Sven Rudolf So we have a lot of pre-trade data we need to crunch and this is not very easy. Currently, we are working on the kind of data warehouse, data bank where we can put all these for pre-trade evaluation, but we need to plug it between the OMS and the MTFs. This is taking more time than expected.
This is why we are currently relying on the pre-trade functionality we get from the MTFs which are helping us to get the pre-selection from the data we have on the MTF, but also which the MTF is providing for us from the information the MTF has collected. We are trying also to streamline it to reduce the footprint on these electronic machines and venues. That’s working well and we are reviewing it on a quarterly basis.
Jo Gallagher Optimizing TCA was another big topic at Trade Tech FX. What is your approach to TCA and what are some of the remaining barriers to its use?
Sven Rudolf With this TCA tool in place, we are often using it to do some backtests for our clients. That means what is the theoretical price of a trade? But what was it in reality to have a comparison? This works sometimes very well. On the other side, with TCA originally coming from the FX space and equity space, they have a lot of data points. You see if your trade was good, bad, or OK. These things are missing in the bond space. So many of the data points are not really helping you at the end if you have the TCA calculation. Many block trades we are doing look ugly in TCA, but they are helping us de-risk the portfolio. Because TCA only gives you perhaps a result for one million, and this 50 million block trade, which de-risks you and is not reflected properly in the TCA and this helps on the other side to de-risk your portfolio and to have a good result the next day for your fund manager.
Jo Gallagher More broadly, where is the industry at and being able to feed real-time analytics or TCA data into the execution process via STP or automation?
Sven Rudolf I think in the FX and the equity space, it could be a good solution to get this STP in place because as already mentioned, they have a lot of data points they can use to support the trader. In the bond space, there are still so many data points missing. They are perhaps a little bit more there in the liquid space.
That means the sovereign Govies, the big ones. But if you’re going down the liquidity ladder, getting to IG and high yield, all these data points are missing and it’s very hard to get a proper pre-trade STP, and TCA flow in there to get the best execution. So we need more data and a very interesting point to watch will be then the consolidated tape. Will the consolidated tapes deliver this information which is missing now to help us to get a better analysis and pre-trade, to do the best execution, and then to get also proper TCA result that you can rely on and prove you have done a good trade.
Jo Gallagher Thank you Sven for your insight and of course you for watching. This has been Trader TV This Week.
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