Preparation tips for the buy-side dealing desk

Published on 31 July 2019

Top tips for buy-side traders: How to avoid being surprised by orders from portfolio managers; data needed to set the scene pre-trade; execution analysis incorporating investment goals; using bots to capture ‘speed alpha’. Jim Switzer, global head of fixed income trading at AllianceBernstein gives guidance on what a dealing team can do before an order hits the desk, to ensure your investors see a net benefit from trading.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. Buy-side traders must prepare as much as they can before they receive an order to deliver fast and effective execution. Jim Switzer, global head of fixed income trading at Alliance Bernstein, gives us his tips on how traders should set up pre-trade. Jim, welcome back to Trader TV.

Jim Switzer Thanks, Dan.

Dan Barnes So tell me, how much can a trader prepare for an order, prior to receiving it?

Jim Switzer I think it starts days and weeks ahead of time, and it’s not to be surprised that you’re getting an order. One thing we pride ourselves at AB is it’s very, very rare that an order comes to the trading desk that we’re not expecting. And it really starts with the trading desk being fully integrated into the investment process. When we’re building portfolios and we’re optimizing portfolios, we’re building that off of an investable universe, that we know we’re going to be able to source. And the traders are part of that, they have an equal seat at the table. So there’s research, both quant and fundamental, there’s portfolio managers, and there’s traders. So, while we’re setting that 30.000 foot risk overvie, the traders are seeing that, they’re recognizing it. So when it’s time for the bottoms-up, portfolio construction, there’s no surprises.

Dan Barnes What sort of data and pre-trade support do traders need in order to help with that?

Jim Switzer We have a lot of tools, we have an Abbie tool which is our bot, we have our alpha tool. We have a prism tool, which is our fundamental research. And then obviously we have our quant tools. And what we’ve done there is we’ve digitized everything, so they can all talk to one another. So no matter what we want to do, when we have a portfolio that we’re looking to purchase, our Abbie tool, which is our bot, is basically using all of our liquidity tool, are fundamental to our quant tool, and it’s going out there and assessing, ‘what’s the best portfolio? What are the best securities to buy?’ The data is there. The inputs are all there. The question is, ‘is it structured or is it something we can use a we can digest?’ We need to organize it. It’s not organized. So, the concept is to take that data and put it into some format, and we built a lot of proprietary technology around that and a lot of people have heard of our alpha tool that will take it. But more importantly, it’s taking that unstructured data and turning it into some kind of structured output. So, we’ll take just typical markets and then turn around and turn that into liquidity tools, into momentum indicators, and into all sorts of tools that will help a trader pre-trade, begin to think about what’s my execution strategy going to be? How quickly, how slowly am I supposed to proceed? And really help a trader to be an alpha generator for the client.

Dan Barnes So, Jim, you mentioned a bot there. What is a bot? and what are they capable of?

Jim Switzer Abbie is our chat bot, and when you think about Abbie, we have to think of it in Abbie 1.0, 2.0 and so on and so forth. And what Abbie was designed to do in 1.0, was really help us to build orders, to take a very manual process that was taking many of our EPMs hours of their day, and to create a streamlined, effective process to kind of do this automated. What Abbie is going to be able to do eventually, is to push us data to highlight, ‘hey, you were trying to do that trade at +50, it got away from you. It’s back, do you want that order back?’

Dan Barnes Where do you see the future for bots in trading?

Jim Switzer I see Abbie being able to connect with other chat bots at sell-sides. We’re in the process right now of test driving it, we’re doing a beta-trade right now with a sell-side firm of doing bot-to-bot trading, where our trading desk is using our Abbie bot, to talk to the other bot, which is talking to that trading desk, and they’ll actually agree on a trade and basically price and book it straight through. So, a big part of the direct connectivity that I see coming, it’s going to involve a lot of this bot-to-bot trading.

Dan Barnes What impact does that preparation have on the trading process and how does that impact investment?

Jim Switzer When we get an order, we’re snapping the market at that moment in time. We’re saying this is where we see the bond trading today. In a perfect world, if we can execute immediately, that’s where it would be. And then what we’re actually doing at the end, is when we do actually purchase it, we’re comparing it to that point in time, but we’re also going back and comparing it to when we got the order, and we’re trying to measure, what’s the alpha that’s being generated by the trading desk. Because we have so many strategies that we can use and, at AB, that’s the portfolio managers that give us that leeway to kind of navigate the markets as we think.

Dan Barnes Do you think execution analysis needs to happen, including the investment process, and including what a portfolio manager is aiming for?

Jim Switzer Yes, we have a chat bot that’s able to look for anomalies in the market that we tell it to look for. And she can recommend to us courses of action bonds to buy. We have these tools and all this data, so we have momentum indicators that are down to the Q-sublevel that’s telling us, there’s more buyers, there’s more sellers. We have liquidity tools both on the buy-side and on the sell-side, so we can really assess what is happening. And then we have strategies, whether that’s traditional RFP or now it’s portfolio trading, which is which is the rage, which we could get into. You see there’s so many choices along the way, so a lot of it is speed alpha; it’s just being able to make decisions extremely quickly, and to be able to react, or to not react, to slow down. And then it’s really going back and running scenario analysis and saying, ‘how did that work? How could it have done better?’ So, there’s a constant feedback loop that we have. Ultimately, at the end we do a trade and now it’s really more three dimensional, so how did this input, how did this input, how did this input? And that’s what we’re trying to quantify.

Dan Barnes So what does this then mean for the investors in your funds and the investors who give you mandates?

Jim Switzer It should mean superior execution and better returns.

Dan Barnes That’s fantastic. Jim, thank you very much.

Jim Switzer Thank you, Dan. Thanks for having me.

Dan Barnes I’d like to thank Jim Switzer of AllianceBernstein and, of course you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.