On this week’s Trader TV This Week, Ed Wicks from L&G Asset Management discusses the fast-moving dynamics shaping global markets. As political uncertainty and shifting tariff headlines cloud the macro outlook, Wicks describes the current trading environment as “fascinating but incredibly hard to navigate”.
Despite earlier liquidity strains this quarter, Wicks says conditions have improved and that L&G’s global trading volumes have increased by 8% year on year, and FX volumes are up by 20%. Looking at trends, Wicks speaks of where he sees the growing role of portfolio trading in credit markets and the rise of bilateral trading in equities to manage risk efficiently.
He also discusses L&G’s newly-adapted global trading model and his trading team’s shift in execution styles, with more high-touch trading replacing algorithms in FX due to increased urgency from portfolio managers.
Interview
Jo Gallagher Set the scene for us–what macro factors are driving trading activity right now?
Ed Wicks I think the macro outlook is fascinating at the moment. There’s a heck of a lot of political uncertainty out there, as we all know, not to mention the tariff headlines that seem to be changing every hour, every day. So it’s incredibly hard to navigate right now. We are seeing investors continuing to pare back their rate cut expectations in the UK and US in particular. And I think people are really noticing the gradual wait and see approach coming through from central banks. And that is going to be their preference, looking for more clarity on inflation before acting. Alongside that, of course, you’ve got the fiscal situation, and how that develops in the US in particular, I think is going to be key for markets. Investors are understandably concerned about fiscal deficits and the plan or lack thereof to deal with them. This has really, really not helped government bond markets in particular where we’ve seen a lot of weakness, particularly in the long end. Alongside, that we have seen weak auctions and they’ve been punished by markets very, very quickly. If you include what we’re seeing from a structural demand and supply imbalance, then all of this exacerbates the current situation. And then looking ahead, it’s going to be really interesting this week. The ECB [European Central Bank], we assume, will probably move to cut rates. And I’ll be really interested to see if that changes any of the narrative coming out from both the US and UK central bankers. If I look at the situation in the UK itself, I think it’s been actually really positive to see the response that’s been put together. First of all, earlier on in the quarter in April, we saw the Bank of England responding by halting one of the QT long end auctions. And alongside that, we’ve seen more recently the debt management office or the DMO look to change the duration on their GILT (UK government bonds) program, which is really encouraging to see. I think they’re really taking notice of what’s happening. We’re gonna expect a long end auction this week in terms of a supply event. And I think a lot of eyes will be on that quite naturally to see how that unfolds.
Jo Gallagher With that context in mind, what does liquidity look like right now?
Ed Wicks Look, I think earlier in the quarter, liquidity was undoubtedly challenging. Although you could still get the size you wanted to execute done, you would pay a slightly higher transaction cost as you might expect. If we fast forward to where we are today, I think liquidity is maybe not entirely recovered, but it’s a lot better than it was. And we’re seeing no issues transacting our business across our global trading desks. In fact, if I look at our global trade in volumes, in aggregate, we’re up about 8% year on year. And actually, amongst those asset class mixes, we’re seeing some really elevated. So FX is a great example where we’re up almost 20% year on year. In terms of how we measure liquidity, that will depend on the asset class. For equities and listed derivatives and even FX to some extent, we’re able to look at the top of order book size to get a good idea of where liquidity is at any point in the trading day. So that’s quite easy. However, when it comes to some of the fixed-income instruments, particularly the cash instruments like credit and government bonds, it’s a little bit more nuanced. So here, the approach we take is to measure the dispersion of quotes that we receive when we enter into competitive RFQs. And that gives us, I think, a really good proxy for liquidity.
Jo Gallagher What interesting trends are you seeing the way fixed income and equities traders are executing their trades?
Ed Wicks At a high level, I think the trading team here is always looking to innovate and improve our trading workflows. A lot of that work actually pays off in volatile markets like the ones we’re experiencing at the moment. I guess while some of these things aren’t new per se, we are seeing a continuation of a couple of trends this year. First of all, I think it’s important to highlight the trend in portfolio trading within credit markets. Now we’ve been a big advocate of this execution channel for many years now, and given the recent market environment, it’s been an extremely helpful part of our toolkit. Year to date, we’ve actually completed almost 200 portfolio trades within credit markets, which is probably a good indicator of the importance we attach to that channel. And even earlier this year, we completed our first Asia credit portfolio trade from our Hong Kong office, which was really good to see. Alongside that, another persistent trend has been the kind of rise of bilateral liquidity in cash equity markets. Again, this has been really helpful for us in terms of helping the traders move risk really, really quickly on any given day with the certainty of execution that that channel brings. Most of the work we’ve done on bilateral liquidity interaction actually started with our London-based trading desk. But now we’re actually seeing that build out and we’re seeing more people come to the market and offering that type of product, particularly in the US. So it’ll be really interesting to see how that plays out. Although we only use it for a small subset of our flow, nonetheless, it is important, particularly in times of volatility.
Jo Gallagher And have market conditions change the way you work with your portfolio managers?
Ed Wicks I think they have. I mean, given the headline-driven markets that we’re seeing, one observation I would make is that portfolio managers are increasingly changing the urgency on some of the orders that they are raising. And of course, this translates into differences in how we think about executing those orders. A good example would be in FX, where historically we’ve relied very heavily on algorithmic channels to execute a lot of our outright FX business and it still remains the case that that’s an important channel. But as we’re reacting to this change in urgency, we’re dialing down some of the use of our algorithmic execution channels in favor of higher touch or RFQ channels, because quite naturally, as the urgency changes from the portfolio manager’s perspective, the traders want to transfer risk that bit quicker. Another way we’ve adjusted some of our trading strategies is by adding a portfolio trading capability into our government bond workflows. Earlier this year, we completed the first portfolio trade in European government bond markets. And now that we have that channel available for our traders, it’s really helpful in terms of risk transfer, in terms of relative value, and in terms of rebalancing as well. Alongside the changes in urgency, the mix of the flow that we’re seeing from our portfolio managers has undoubtedly changed. We’ve certainly seen a higher volume in derivative markets. We’ve seen portfolio managers lean on certain synthetic instruments to add or reduce risk very quickly. Alongside that, we’ve also seen a slight increase in the amount of contingent orders that are coming through the desk. So where portfolio managers potentially are looking to enter a position and exit a position simultaneously, either cross geographies, cross currencies, or just a relative value trade. So that’s been another trend that we’ve seen. I would say the one thing that we haven’t seen change is our ability to leverage our global trading model. So using our desks in Hong Kong, London, and Chicago really flexibly, and that gives all of our investors great confidence. It means they have full access to all the liquidity possible 24 hours a day and five days a week.
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