How to scale up EM trading efficiently

Published on 13 July 2021

Investor interest in emerging markets (EM) is adding pressure on thinly-stretched buy-side resources. With over 80 countries accessible in the emerging market space, expanding operations or starting afresh in EM investment and trading creates many choices. Reducing the friction of EM operations allows asset managers to access these markets without increasing resource pressure, and increasing the pace of engagement.

Tannia Munroe, Director and Emerging Markets Product Manager at Tradeweb, highlights some quick efficiency gains that buy-side firms can seize across asset classes. EM markets are more mature in their adoption of electronic trading, and that allows rapid expansion of existing platforms and interfaces, with familiar tools and protocols.

Dan Barnes: Welcome to Trader TV – your insight and trading for professional investors. I’m Dan Barnes.

Investment managers are under increasing pressure to scale up the emerging markets trading operations to cope with increasing investor appetite for EM assets. Joining me today is Tannia Munroe, Emerging Markets Product Manager at Tradeweb. We’re going to be discussing exactly how investment managers might achieve that.

Tannia. Welcome back to the show.

Tannia Munroe: Thanks so much for having me, Dan. It’s a pleasure to be back.

Dan Barnes: If an investment manager wants to scale up the EM trading operations today, what are the potential barriers to that?

Tannia Munroe: I think the first thing that I would say is obviously it’s a very global product in nature. Right. You’ve got over 80 countries sort of available to you, different geopolitical environments, different economic environments. You know, things like infrastructure in different countries matter in the financial markets. So all of these things are things that you should be looking at and kind of gauging in terms of what your risk appetite is for those.

Additionally, you really do need specific knowledge in terms of things like capital flow restrictions, so if perhaps I want to invest in Brazil or Indonesia, are there restrictions in terms of what percentage of my investment I can have in those countries? Do I have to invest in local currency or can I invest in hard currency? Is it an I.D. market or do I need some sort of registration beforehand?

Trade barriers are also something that people really need to consider. For the last couple of years, we’ve been really, really focused on China, not just in terms of offering something like Bond Connect, but also just, you know, making sure that we are handling sanctions appropriately and that our clients understand what they are and that the platform is doing everything they can to be compliant. We want to make it as seamless for clients to comply with regulation and market structural reform as possible.

Dan Barnes: If somebody is scaling upin EM, they might be starting with a completely blank slate. What are some good first steps for them to take?

Tannia Munroe: I think it’s not really a blank slate. I do think that there are already tools there for clients that want to get into emerging markets. Really, from an efficiency perspective, you can look at the systems that you’re already using and what protocols exist already for other products that might be related if you trade interest rate swaps or if you trade investment grade credit, where do I have preexisting connectivity? So you’re going to first make a determination in terms of what countries do you want to be in, what types of instruments you want to invest and write a platform like trade? What gives you a lot of opportunity from that perspective?

We cover at least five different asset classes within EM. We’ve got hard and local currency bonds. We have emerging markets, CDX, single name sovereigns, China bond products. We have interest rate derivatives on the EM side as well. So lots of choice there. You want to look at market share as well, and I’ll say that volumes are not the only story to tell there. You want to see, OK, which platforms obviously have the highest volume, but also which have the highest growth rate, that’s a great indicator. Emerging market swaps is a new product for us. We’ve done over 420 billion dollars year to date. What’s really impressive is the growth there.

Dan Barnes: And how mature are markets in terms of adopting platforms for trading?

Tannia Munroe: I think the quick answer is more mature than many people think. Both the sell-side and the buy-side have become much more comfortable with EM markets in general. All of our protocols support the co-mingling of global products, right? We’ve got local currency instruments both on the cash and derivatives side that are very well supported both by the dealer community, but also very compelling and being used by clients.

As you know, the world continues to get more global in nature and EM is no different. After the pandemic, we really needed to embrace technology in a way we hadn’t before, and that became very, very evident in the world of EM. Platforms became much more commonplace, no longer something to be wary of, but rather something that folks embraced and knew could help them. And not just something for the largest clients. We’ve got a lot of new clients coming into the EM space that are smaller, that are not the traditional, very large asset managers or hedge funds.

Dan Barnes: So then what does that adoption of platforms look like potentially to a trader?

Tannia Munroe: To give you one example, we’ve rolled out portfolio trading into EM, and that’s basically a protocol that allows you to trade a basket of global bonds with varying degrees of liquidity and diverse risk profiles in one single transaction. Anyone that’s heard me talk about portfolio trading before has heard me talk about the benefits of getting STP, ‘straight through processing,’ and it being an efficiency tool. However, one of the things that’s most relevant and important about portfolio trading is really that it gives you certainty of execution, right? It also gives you the potential for more attractive bid offer spreads. In the EM it gives you the ability to prove best execution in the same way that your colleagues in the developed markets can. We have a very robust transaction cost analysis tool that our clients are using, and we’ve gotten great feedback on that.

Additionally, we’ve got more data transparency tools for traders, right? Things like composites for EMIRS that weren’t available before. In the cash credit space we’ve got our AI price, which is really our benchmark, composite price. We have a new liquidity score that gives you the ability to really determine, okay, ‘how liquid is this particular bond?’ We have a liquidity score for over 7100 EM bonds on the platform.

Dan Barnes: That portfolio trading aspect is very interesting. So potentially somebody could be taking bonds from Asia-Pacific and from Latin America and trading them in a single portfolio with free trade transparency from the data feed?

Tannia Munroe: That’s absolutely correct. And in fact, we see many PTs that way. Before I sat down to do this interview with you, we had a portfolio that was very global, all EM regions included, and was multi-currency and it got executed seamlessly. And it’s efficient for both sides, right? It’s efficient for the client, but it’s also efficient for the dealer. Right. A client goes into a portfolio trade expecting the entire basket to trade. A dealer goes into pricing a portfolio trade, understanding the full risk profile of the portfolio, and with the understanding that it’s going to trade in its entirety as well. And it works out well for both sides

Dan Barnes: Then, with interest rate swaps, what exactly would having that pre-trade composite do for them?

Tannia Munroe: I think having that pre-trade transparency gives traders the comfort of knowing what sorts of levels they can expect. It’s hard to know sometimes in these EM markets what is a good level. Right. So having a composite can give you some indication. Additionally, for a dealer, you can use that as a benchmark on your own end. How does your pricing compare to the composite level? And I think it’s something that is available in most developed markets already and something that clients are used to seeing, and so they’re all very happy to hear that we’ve got them for emerging markets now as well.

Dan Barnes: The biggest pressure typically on traders is always time. But of course, if you’re trying to trade across 80 different markets, having all that knowledge is a big issue for a trader in terms of skills and they’ve got the time pressure of managing trading across those markets. I can really see the portfolio trading in some of this pre-trade transparency, creating massive efficiencies on the desk.

Tannia Munroe: Exactly. It’s all about efficiency. It’s about being able to do more in less amount of time. But also it’s about having tools that allow you to get better execution, because at the end of the day, if I help you trade faster, but you don’t get a better level, that’s not great. You need both of those things.

Dan Barnes: What advice would you give to heads of trading wh are just starting out on this journey?

Tannia Munroe: I would say speak to your partners at the sell-side, other firms, but also on the platforms and try to understand what capabilities can either be ported across to this market, what you can use that is already there so that you don’t necessarily have to increase headcount to get into EM and you know, which platforms in which systems the market is most comfortable using.

Dan Barnes: That is all great advice. Tannia, thank you so much.

Tannia Munroe: Of course. Thank you, Dan.

Dan Barnes: I’d like to thank Tannia for her insights today and, of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.