How reliable is electronic bond trading in volatile markets?

Published on 3 April 2019

Voice trading has always been the go-to method of trading bonds in choppy markets, to be assured of firm prices. Speaking at the FIX Global conference in London, Carl James, global head of fixed income trading at Pictet Asset Management gives the buy-side traders’ perspective on how this is changing as markets become more electronic and data-driven.

Dan Barnes Welcome to Trader TV fixed income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. When markets get volatile, bond dealers have traditionally relied on voice trading to make sure they can secure a price, however, that is changing. We’re speaking with Carl James, head of fixed income trading at Pictet Asset Management, from the FIX Conference in London, to get the buy-side view of electronic, bond-trading evolution. Carl, welcome to Trader TV.

Carl James Thank you very much.

Dan Barnes Why do traders turn to voice when markets tend to get choppy?

Dan Barnes Historically, traders have been used to executing over phone, so there’s a little element of muscle memory in there. The other element is the search for liquidity. So, it’s about finding the best place to execute the business. It could be as hard as finding that bond. It’s not even, ‘I’ve got these choices.’ There might not be a choice. Now as the technology on trading desks is still at an early stage within fixed income, but when markets are volatile and liquidity dries up, then actually you revert to the muscle memory which is about relationships. And what you’re able to do is phone up and say you’re representing a particular asset management house and your own personal brand as well. That still carries some weight as well. Rather than if you just send an electronic message, it’s you know, it’s come from this firm and there’s no the trader, so the other side has no context around it.

Dan Barnes Is electronic trading becoming more reliable in volatile markets?

Carl James It’s more reliable in the sense of there are more choices. It’s more reliable because the people providing liquidity are now more used to providing that liquidity. And don’t forget, there are different methodologies of execution. So you might have the RFQ model, you might have the central limit order book model, or the synthetic central limit order book model, or you might have the dark pull model. So, there are different elements to it, not only the methodology, but the instrument as well. So, yes, it’s becoming more reliable, but it depends.

Dan Barnes And is pricing data becoming more reliable to enable electronic trading in any particular instrument classes?

Carl James So the pricing data, which I think you’re talking about, is historic pricing data is becoming better in the more liquid part of the market. So, if you’re in the rates area, then yes, there’s enough data for you to make some sensible, more informed choices. But as soon as you start to move outside of that into the much less liquid area, let’s say high yield, there are parts of the data that you can pick up on, but it’s not as perfect or as good as in the rates area.

Dan Barnes And does that have an impact on your ability to actually measure execution quality?

Carl James When you speak about stressed markets, that’s a different space to be in. So the data that you’ve picked up over, say, the last 6 months, or one year, and then you have a really volatile day, that information might be utterly useless to you, but it might give you a guide. And that’s why I think that the data-driven trading is becoming more and more important. However, relationships with your executing counterparties is really important as well, because they need to be confident that you have a credible model to engage with them. You’re not going to run them over. You know, it is about having that long term relationship. So at Pictet Asset Management, what we do is we do reviews with our top counterparties and we go through the data with them. I do a live presentation on Tableau, as it happens. And we demonstrate where they sit, where the hotspots are. Now, that to me is actually part of best execution because you are absolutely giving feedback to the broker, and you’re able to say where they need to do better, etc. So, that is actually part of best execution for me.

Dan Barnes And that’s interesting that takes us to the actual end investor. Clearly, there are two outcomes the end investor needs to have, one is to see the best execution is fulfilled and the other is potentially the impact on the actual investment returns themselves. Do you think the way the trading is managed, does that have an impact on investment returns directly?

Carl James There’s a spectrum of what buy-side desks are able to do. At one end of the spectrum, you have a processing unit, it’s literally, it could be a sausage factory. You are literally processing the orders. You know, I personally don’t adhere to that, however, for some models that might be useful, because actually it is about getting the trades done, moving on. When we meet with clients, I think it’s important for us to say, ‘yes, we can evidence best execution now.’ Frankly, for me, I think that’s just, that’s your base level. Of course, you do best execution. It’s actually beyond that. So, ‘what is it the dealers do? What is their role within engaging in the investment process?’ The better that you execute, the more efficiently you execute, the more returns you’ll get your underlying client. So, we do a number of engagements, whether it’s educational or whether it’s actually just purely having client meetings. And we walk through our technology, we talk to our people, we talk through our processes, and it’s highlighting, you know, the really good work that we do.

Dan Barnes That’s fantastic. Carl, thank you so much.

Carl James Thank you very much.

Dan Barnes I’d like to thank Carl James of Pictet Asset Management, and of course, you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.