Ramon Baljé, head of fixed income at Flow Traders, discusses trends he is seeing in algo trading, credit markets and exchange-traded funds as desks prepare for the final weeks of the year.
He looks at evolving activity outside of market hours across regions, including blurred lines across market close and open, and how ETF flows are interacting with bond market liquidity.
Baljé also unpacks what needs to be on trading desks’ radar coming up to year-end and going into 2025—including what he sees as the biggest game changer for European markets.
Interview Transcript
Jo Gallagher Welcome to Trader TV This week, your insight into how trading desks to prepare for the week ahead, I’m Jo Gallagher. Today I’m joined by Ramon Baljé Flow Traders to discuss the main topics and events leading this week. Ramon, welcome to the show.
Ramon Baljé Thank you very much.
Jo Gallagher What trends in algo trading are you seeing as we come into your end?
Ramon Baljé I guess if you look at credit markets overall in the US and Europe, probably now 50% of the total volumes are traded electronically and obviously algorithmic trading is done electronically. If you start to look into the smaller size buckets up to 1 million, we see the average trading size in the U.S. has come down from 600K to 400k.
Looking at the European credit markets now, probably 25% of the volumes are now under 1 million and over 75% of tickets are now under 1 million. Market structure is changing and the ability for end investors to execute trades is changing a lot. Many years ago you had a lot of voice traders and by year-end, obviously, people went on holidays and kind of closed down for the year, with more automated ways of trading this can continue all the way into year-end and we don’t expect any changes from that perspective.
Jo Gallagher And what are you specifically seen in terms of activity around market open and market close?
Ramon Baljé Yeah. When you look at ETFs, for example, and especially ETFs that track global baskets. When you trade those ETFs, very often some components of the market are closed. So you have to use models to estimate where those components are while the underlying is closed. If you have good models to price these global baskets, you can continue to trade after the close. If you start to use the same technology for bonds and especially for US Dollar investment grade, it is definitely possible to trade US Dollar IG pre-U.S. Open during Asian hours and also during European hours. I guess these lines are getting a little bit blurred from that perspective. So it’s not so much when the market is open is more when you can properly price it.
Jo Gallagher How are ETF flows interacting with bond market liquidity?
Ramon Baljé So the growth of the ETF ecosystem is probably one of the big megatrends in financial markets over the last 5 to 10 years. ETF AUM is probably well over 10 trillion, probably more like 13 trillion. And some people are forecasting this to go to 35 trillion over the coming years. Zooming into the fixed income component of it, there’s well over 2.3 trillion outstanding at the moment.
If you look at the liquidity in the ETF ecosystem, that’s trades OTC (over the counter) to see but also on exchange, that’s obviously phenomenal. And I guess that liquidity interacts with the bond market through AP (Authorized participant) activities, but also indirectly as a lot of these products are being hedged with each other as well.
So this has a huge effect on both ecosystems. A lot of products continue to be launched. If you look at CLOs, if you look at the maturity ETFs, any part of the universe where the bonds are being traded and there is obviously demands by end investors, ETFs can be launched and this is continuing to grow.
Jo Gallagher More broadly what should be on trading desks radar for the rest of the year going into 2025?
Ramon Baljé Yeah, there’s hopefully a lot happening in a world with new administration coming in in the U.S. and lots of geopolitical developments in the world. One of the things that we find very important is the consolidated tape here in Europe that’s coming into effect next year. I think this is a game-changer for the bond markets. If you look at Trace in the US.
Many academic studies show that liquidity has increased. Obviously, transparency has increased. New players can also enter the markets because there’s a lot more information available. Transaction costs have come down. So this will also have a huge effect on the European markets and we are very much looking forward to near real-time consolidated tape.
Jo Gallagher Thank you Ramon for your insight and of course, you for watching this been Trader TV This Week.
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