Overcoming ‘illiquidity’ through better engagement and alternative trading protocols

Published on 1 October 2020

NEW Trader TVCarl James of Pictet Asset Management analyses corporate bond trading activity in September. He asserts that the illiquidity concerns which some buy-side firms are reporting in the market are really an issue of engagement. By nurturing relationships, applying analytics to sell-side support and using alternative trading protocols, buy-side traders can develop strategies to get better dealer liquidity over the long and short term.

Data from MarketAxess.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Joining me today is Carl James, global head of fixed income trading at Pictet Asset Management. We’re going to be talking about the trading conditions and corporate bond market after summer. Carl, welcome back to the show.

Carl James Thank you. Lovely to be back.

Dan Barnes So tell us, how would you characterize the liquidity profile in the credit markets that you trade since the end of summer?

Carl James Essentially, I’d say it was pretty stable. If you had euro, US and IG; there’s been a bit of cash building up over the summer, been a lot of primary activity, the secondary flow is quite active. EM, I guess bids were probably easy to come by thatn offers, essentially. We’re kind of right on the headlines actually at the moment, so we’ve kind of come out of that first area of things have settled down, a lot of issuance and I think we’re now hitting that sort of fourth quarter, every have a little think and just looking towards the end of the year.

Dan Barnes What’s your perspective on the illiquidity problems that some people report in the credit markets?

Carl James It’s an interesting question because there is an element to me, where I think; ‘what are they expecting?’ You know, if you think historically, bonds were a buy-and-hold strategy, and I’m not quite sure that there’s a perfect balance between supply and demand, and different people are investing in bonds for very, very different reasons. I’m not quite sure I buy the phrase ‘illiquid’. It’s more just a case of, you know, there’s more demand. And that’s driven by chasing yield, looking to match up assets versus liabilities. There’s a number of layers to it. So I think at the heart of your question, though, people were used to a certain level of engagement by the market. And as we went through the pandemic, some of that engagement reduced. It’s about really how you sort of look to engage with the market itself. You know, who is it that you will, if you like, service providers? Are you essentially just doing RFQs or are you using different methodologies? Me and my boss, we’ve made a real effort to engage with our top counterparts, really sort of do some detailed work regarding their broker review, where they’ve done very well, places where they’re not doing very well. And that might be, they say, ‘yeah, commercially, we don’t want to be involved in that space’, but it’s been a collaborative effort to try and say, ‘well, look, we want you to because of if you do well, we do well’. There’s an element of a symbiotic relationship. Nurturing those relationships is actually pay dividends. Through the pandemic there were particularly two houses, in my experience, that really stood up very well and captured far more business from this. The other thing I talk about is different methodologies of trading. You know, essentially you’ve got the RFQ model or the bilateral voice trading, but there are other methodologies; there’s dark pools, synthetic central limit order books, there are different ways that you can engage in alternative liquidity or finding alternative liquidity.

Dan Barnes So you see short term and long term strategies for overcoming any of those barriers to accessing liquidity?

Carl James The short term gain really is really understanding what it is you’re trying to do as an asset manager. Will you have high velocity in your portfolios? Or actually, is there some pragmatism in what you’re looking to shift off the portfolio and bring in the portfolio? So there’s a lot of portfolio optimization that we’re looking at, a portfolio manager might look at a particular bond. Well, if another bond has similar characteristics and is available, then there’s a conversation to be had rather than chasing a specific bond.

Dan Barnes It’s quite interesting, I have a sense some people think about the application of technology to trading very much about the execution process, but I have the sense that you are really applying it in that feedback process in terms of getting information from the markets to support decision making. And that’s giving you both short term and long term iability.

Carl James The long term element really is a much more quant-driven process predicated on some really good technology. We built a database, we have direct feeds from the brokers giving their access. We also have 700 days worth of trading of our trading. So any trade that comes into our IMS; what will happen is that database which can carry five billion messages a day. What will happen is that anything relevant of that particular order will attach itself to that order instantaneously, so the dealer instantly is able to look and go, ‘who have we traded with? In what size? How have we traded with them? And if we’ve done an RFQ, who came second, who came third? How far away were they? Are there any axes that were around today? We hold those axes to three months. After three months, it goes up to the cloud. So we’ve got a huge amount of data. And again, that feedback loop goes back into the brokers. We can overlay the business we’ve done with them and overlay the axes they’re sending to us.

Dan Barnes Can you define the impact that your approach has for investors in Pictet?

Carl James We know that we have a set of portfolio managers that can deliver alpha, but I think that’s too simplistic to really put it in those terms. It’s not just the PMs, there’s a whole holistic view that we need to be thinking about. There’s a lot of work that we do between the portfolio managers and the traders, and we’re very, very close to those two teams together. It’s really about understanding what their portfolio is, what their strategies are, what they’re looking to do in those portfolios for the future. What are the names that are looking for? In all honesty, I don’t really think this is rocket science. There’s a lot of asset managers doing this, but it’s really sort of predicated on the ability to get to that data quickly in terms of the added value to the end client. It’s a bit difficult to break it down into sort of those individual building blocks. I’m sure in time we’ll be able to do that. We’ve actually got an internal project to identify specific elements of trading alpha that we bring. It’s just a project that we kind of thought would be interesting. So we thought we’d throw that into the mix.

Dan Barnes Very good. Carl, that’s been excellent. Thank you.

Carl James My pleasure. Thank you very much.

Dan Barnes I’d like to thank all for his 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 or ETFTV.NET.