Dylan Blair, global head of USD credit trading at Millennium Advisors, discusses the need for robust and adaptable pricing models and mechanisms for accurately measuring liquidity and risk in fixed income markets. He looks at the value of having a hybrid system that combines quantitative and qualitative methods of pricing liquidity, particularly during spells of elevated market volatility.
In this episode, Blair also unpacks some of the major trends he is seeing credit trading over the past 14 months; how he sees exchange traded funds (ETFs) and portfolio trading (PT) playing a role in managing cross-asset costs and risks, and where he sees the biggest innovations and limitations to electronic trading in fixed income emerging.
Transcript
Jo Gallagher Welcome to Trader TV This week your insight into how Trading desks can prepare for the week ahead, I’m Jo Gallagher. Today I’m joined by Dylan Blair at Millennium Advisors to discuss the main topics and events leading this week. Dylan, welcome to the show.
Dylan Blair Thanks so much, Jo
Jo Gallagher So we have a Sports Day here on Trader TV This Week. I’m wearing my jersey in support of Ireland in the Six Nations Championship. We have a big game coming up on Saturday and you’re obviously wearing your Philadelphia Eagles jersey. Massive congrats on the Super Bowl. Are you a big fan?
Dylan Blair A huge fan. I have grown there. Mom and dad still live in the city, and I’ve been a fan my whole life, and I want to wish the men in green good luck against the French this upcoming weekend.
Jo Gallagher Thank you. So to kick us off, tell us, what are some of the big trends that you’re seeing in credit trading strategies from 2024 and so far in 2025?
Dylan Blair We’ve seen a little bit of elevated volatility. Whereas, if you look at 2024 was a relatively benign year. Earlier, spreads were within a relatively narrow band near multi-decade tights for much of the second half of last year. The VIX was very, very muted around 15.5 over the course of the year. We only saw two real spikes in volatility that took place through 2024. And already we’re seeing elevated volatility in the first two months of this year. I think the reason behind that is a combination of having a new administration coming to the white House. It’s really impossible, as we’ve learned over the last few weeks, to predict what is going to come from the executive branch and what of those announcements are actually going to be consistent over the coming quarters, and then which of those can actually be passed into law? And when you combine that with interest rates, which still remain elevated by historical standards, I would expect to see a little bit more credit divergence this year, a little bit more alpha picking strategies. It will be fun to be a credit picker once again. And a number of my friends who are portfolio managers of hedge funds say that they’re excited about generating alpha for the first time in a while.
Jo Gallagher And what role are ETFs and PT trading playing in managing costs and risk, such as asset correlation risks?
Dylan Blair Portfolio trading has become massively popular over the last few years. A very easy mechanism by which very large clients can move big swaths of risk, with a relatively low cost to do so. The reason that they’re able to do that is because of the popularity of the ETF marketplace. ETFs had about a trillion of inflows in the U.S. last year, and passed active investments for the first time in 2023. So the popularity of passive investments overall, the popularity of the ETF marketplace overall has lend itself towards clients benefiting from that greatly, and that ultimately benefits the retail investor. And in terms of managing risk, one of the best ways that dealers now can provide better liquidity for clients, that can provide tighter bid-offer is because they now have the means of large pools of risk in the ETF marketplace to offload a lot of the client trades, which they facilitate. And so it’s been a very easy market for liquidity. and it’s been a great time to be a fixed income investor.
Jo Gallagher And so how do you measure liquidity and what is your approach to qualitative and quantitative pricing mechanisms, especially in the context of where we see market volatility?
Dylan Blair Well, I think having the right setup is really important. Liquidity is ultimately how much risk you can move into the marketplace without moving the price, you know, in its simplest form. I think that the perfect model of pricing risk is the model that we employ here in Millennium, where we have the most robust model, I think the best model of the industry for pricing risk and pricing assets. But we have over 30 traders globally that are always involved in those decisions. That human plus machine combination allows us to adapt to when we do see volatility spike. You know, this new protocol of having single pricing models and pooled risk, which a lot of dealers have employed in recent years. We haven’t really tested out how those mechanisms operate, when we see volatility spike. In 2022, the VIX averaged 25, which is materially higher than it was last year at 15. Our clients want to know that we’re going to be consistent always there pricing liquidity when they need it. And that combination I think sets us up very well for when that does ultimately happen.
Jo Gallagher Where are you seeing the biggest innovations in fixed income trading, and are there limits to what you can automate?
Dylan Blair Well, Josephine, I think that the greatest innovations that we’re talking about here at Millennium are things that I’m not allowed to share on this show right now, but if you’d like to have you back in December, I certainly would accept that invite. I think that there’s two things that come to mind, one is just the market structure overall, which is not a single innovation. But fixed income is going through a massive structural change in terms of how it’s treated. It’s becoming much less centralized. The average ticket sizes are smaller. Electronification has increased dramatically. Equities 25 years ago went from being traded in fractions to decimals. They went from being single point of trade where you had to traded on the floor of the NYSE to being traded globally on ECNs (electronic communications networks) 24 hours a day. Fixed income is going through a very similar transformation today and the ultimate beneficiaries of that are the retail investor. I don’t think you could ever fully automate fixed income, however, because the reality is, if you want to trade AT&T, for example, in equities, it’s a single ticker. It’s highly liquid. If you want to trade AT&T bonds, there’s over 200 Cusips. So you’re going to be able to automate some of the most liquid of those. But you’re always going to need to have that human element in the middle. Who is that buffer between finding buyer and finding seller. So I think the innovation within global fixed income has been incredibly impressive, and I think that there’s a lot more still to come. The second thing that comes to mind is AI. I mean, AI is incredibly powerful. I don’t think it’s fully understood by the marketplace and certainly not fully understood by me. It reminds me of quantum mechanics in a way, and that it’s really hard to get your head around what the potential of it really is. But I feel very, very confident, particularly after talking to a number of my friends on the buy side, that AI is going to be a big part of generating alpha in the years to come.
Jo Gallagher Well, I’ll have to make a note to have you back on that later this year to tell us what you’re working on.
Dylan Blair But appreciate that. And if I could take a moment to thank my mom. Her name is Donna. She was a mortgage bond trader in the 80s and 90s. She used to bring me up on the train from Philly up to World Trade Center Tower number two, onto the trading floor. It was always fun watching her work. I love the environment and I’m here today because of her.
Jo Gallagher Amazing. Shout out to Donna from the Trader TV team as well. Thank you, Dylan for your insight and of course you for watching. This has been Trader TV This Week.
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