JP Morgan: Unpacking the liquidity challenges in fixed income and breaking down trading siloes

Published on 25 July 2023

While there is an uptick in electronic trading and improvements in technology there are still major challenges for the buy side in understanding what platforms to use, where to trade, and how they should interact with the growing variety of liquidity pools.

Eddie Wen at JP Morgan unpacks how the bank is embracing the push to electronification in fixed income to better serve trading desks by developing new forms of data analytics, integrating trader workflows, and promoting economies of scale by breaking down siloes between varying asset classes.

Transcript of interview:

Jo Gallagher: Welcome to Trader TV at FILS – your insight into institutional trading. I’m Josephine Gallagher. Today we’re discussing how trading desks are evolving in response to liquidity challenges. And we have Eddie Wen of JP Morgan joining us today.

Eddie, welcome to the show.

Eddie Wen: Thank you for having me here.

Over the broader last several decades, the markets have continually moved toward a more electronic landscape and from the buy-side as also sell-side perspective, they’re both adapting to this changing liquidity dynamics. Transactions are happening more electronically. The number of trades that we are processing on the sell-side is increasing, the costs of execution is generally going down. However, the dynamics of how you trade and what you trade with, what platform you use, how much investment you make, these are general challenges that a lot of the buy-side and sell-side are facing.

Jo Gallagher: And how is JP Morgan evolving its trading function?

Eddie Wen: First, I mentioned already it’s embracing electronic trading. Every trading desk will have an electronic trading team that understands the technology market structure, as well as have the quantitative skills to analyze a lot of data to be ready for this change.

Secondly, it’s really embracing data analytics and the more recent topic around AI, generally speaking, with the digitization of the workflow, businesses are becoming more automated. There’s a lot more data on the back of it, the ability to analyze the data and use it to optimize our business and having the capability of doing that consistently and continually over time. I think that’s been a huge advantage.

Thirdly, I think it’s really around promoting economies of scale. The numbers do start to add up, and especially as margins are compressing, the cost of execution becomes a big factor when it comes to a dealer’s ability to service a large number of customers.

And finally, I think one of the biggest benefits for an electronic fixation is it allows us to kind of break down many of the silos. Historically, we look at the organization structure and how we manage our business. Typically, they’re focused along vertical product lines. And increasingly, you’re seeing the risk characteristics of different products look very similar. Take, for example, in our credit and equity space, we recently combined a credit and equity businesses together, products like single security trading, portfolio trading, ETF trading, all that is now managed under one team, under one technology platform, and sharing a lot of the risk characteristics that benefits all these businesses together if you put them in one package.

Jo Gallagher: Fantastic, and what are the services that are seeing the most engagement?

Eddie Wen: There’s been a general uptick across all electronic trading product development. I think you’ll see that a lot of clients are trading more electronically simply because it’s easier and the cost of execution has been a lot lower, specifically in areas like credit. Electronicification has really taken hold, particularly around portfolio trading as well as ETF, that’s been a growth area. In areas like foreign exchange and interest rates, uptake of algorithmic execution has been the focus. We recently launched a US Treasury algorithm that allows clients to execute benchmark Treasuries algorithmically, very much like the way people have done it in equities and foreign exchange. That’s been a new product innovation.

Product possession of data analytics has been a really interesting area. We’ve been building a lot of tools that takes advantage of the information that JP Morgan has and provide analytics for our clients. Like, for example, in foreign exchange, we have a product called Net Flows, which allows us to present to a client the aggregate flow characteristics that we’re seeing in the foreign exchange market.

We have a portfolio analytic solution which started in an investible index area of the business in equities and now is being expanded to Delta One as well as credit and loans and allow those products to kind of have the same analytical capabilities that’s built for another asset class.

I would say that in general, providing workflow solutions that help clients do business, the bank has been a big focus. Software that we’re building and getting them much more integrated with the bank, making their jobs easier has been a huge focus on product development.

Jo Gallagher: I’d like to thank Eddie for his insights and thank you for watching. This has been Trader TV.