High-touch trading allows larger risk transfers to be carefully managed through buy-side trading desks, but faces considerable challenges in delivering efficiency.
Electronifying the workflow, price and liquidity discovery process can increase traders’ capacity to scale up their trading, simultaneously reducing costs and increasing the potential for alpha generation.
Trader TV spoke with AXA Investment Managers’ Lee Sanders and MarketAxess’s Chris Jones to understand how new tolls such as the Targeted RFQ protocol can help traders find this sweet spot for trade execution.
Interview
Dan Barnes So first of all, Lee, how do we define high-touch trading and when is it most effective?
Lee Sanders At Axa, we definitely look at high-touch trading as something which is more complex, larger in size, trickier than a kind of smaller-size trade, something which has to be humanized rather than automated. Market impact is also a thing we take into context and also the underlying market that we’re trading in as well. Some trades in a normal market might be low touch, but as soon as we get into a crisis, it could be more high touch.
Dan Barnes And then what are the limitations of high-touch trading historically?
Lee Sanders Clearly it’s not very scalable. I mean, if you are using a lot of high-touch trading, you know, it’s very labor intensive. You’re on the phone a lot on negotiating trades. You have to have traders rather than machines working on this business for you to bring it to conclusion. You know, you’re very sensitive around the transaction cost analysis. You know we look at that all of the time at Axa IM and obviously MarketAxess look at that with us as well with their CP plus and data analysis. What a high-touch trader does is control the cost of the execution, and if we have to do that on phone or we can do that electronically, we’ll probably veer more electronically if we can because we have a better audit trail around it for compliance, etc.
Dan Barnes And Chris, how have you helped high-touch trading evolve then?
Chris Jones So we’ve been working closely with the buy side such as Lee at Axa and also our sell-side clients too. And we believe that we have released our most friendly protocol to date to work with both sides. It’s called targeted RFQ and MarketAxess is enabling Lee to send a targeted RFQ to banks. For the sell side to see the inquiry they have to be giving us their pre-trade data. So then Lee can see when a specific dealer is axed on a security that he wants to trade. So it’s very contingent on all of our axe data that is coming into the system. and also we have our Trax data that works alongside this protocol as well. So if Lee was to send an inquiry he is capped at the amount of dealers that he can send that inquiry to and open trading is off by default. They will actually see that it’s a targeted RFQ coming down the pipe from Lee and that’s why the pre-trade transparency is very key to enable Lee to make that decision to put those specific handful of dealers into competition.
Lee Sanders The banks want to know that we are targeting them and they see that message, but we know that they should be winning this trade. Therefore, the ability for them to price more competitively will come through. As they see they’re targeted more, I think the pick-up will grow. And I think if the banks are looking to build their portfolio trading capabilities, being very highly rated on the targeted RFQ in size is going to feed into that portfolio trading capability for them as well.
Dan Barnes Now, in terms of the instruments that you can trade with this, what is the range?
Chris Jones So currently we have it live for all investment-grade products, high-yield, and emerging markets. But we can see that evolving into security, such as municipals down the road as well.
Dan Barnes Very good. And how do see dealers buying into this?
Lee Sanders My initial conversations with the street, everybody seems to endorse the protocol. I mean, why wouldn’t they? It’s something, you know, if you’re targeting a counterpart, it’s definitely something which is gonna be more appealing for them than going all to all. You know, when you don’t get 30 prices back from a 40 list, it does make you wonder why you’re showing those trades out. So this brings it back into the control of the bigger buy-side and the bigger sell-side.
Dan Barnes So that’s really helping with information leakage. And then how do you see it fitting into the overall ranking trading protocols that exist?
Lee Sanders Initially, it sits in the high-touch world. So on my desk, you know, I’m responsible for high-touch trading where it adds clear value. If you just look at what it can do down the road, it shouldn’t only be for single RFQ, for size orders or even smaller orders, which are slightly more liquid. It can be rolled out into list trading where I think it has a very tangible benefit. Also, to the quickest growing part of the toolkit portfolio trading. You know, you get a portfolio of 500 million, 300 million. you then load it up and the MarketAxess data and your own data can tell you where you are likely to get the best outcome of a trade. Well, that’s got to be the way forward.
Dan Barnes And then how do you see high-touch trading evolving from here?
Lee Sanders There was a recent FILS communication about how younger traders are less likely to build relationships. So there will be a growing importance of electronic trading for higher touch going forward. Personally, I think high-touch trading moves into the low-touch trading world to a degree. I know it sounds strange, but looking at that technology, as we look to automate the smaller tickets, rather than using antiquated wheel technology or static, counterparts to try to reduce the amount of counterparties that we’re asking. Using something more fluid like targeted RFQ will make a difference to our market impact even for the kind of high volume high-frequency trading that we are doing on the kind of smaller tickets. I think also high touch trading will develop to look at resting orders and how you can cut that order into smaller trades and work it through. I mean there’s two things with high-touch trading Dan, there’s instantaneous risk transfer, which is what targeted RFQ gives us, or there’s a more latent approach to it. You can leave an order resting for a couple of days and using MarketAxess’s smart technology, chip away at that through, you know, reverse RFQ and natural liquidity.
Dan Barnes I’d like to thank Lee and Chris for their insights today and of course you for watching. To catch up on our other shows including Traded TV This week at 6.45 am UK time every Monday morning go to TraderTV.net
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