Streaming prices: The right protocol for the trade

Published on 3 September 2019

Trader TV: New trading protocols like streaming prices can boost bond trading execution, but buy-side traders must determine when is best to use them. Across the range of fixed income instruments and markets different ways to trade can create optimal execution based upon the portfolio manager’s investment goals. Chris Bruner, head of US credit at Tradeweb, talks through the decisions that traders make to select the right protocol for the job.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. New trading protocols, like live price streaming, are giving traders the right choices to support their portfolio managers’ investment goals. We’re talking with Chris Bruner, head of U.S. Credit at Tradeweb, about how traders can best use these new protocols within the trading workflow. Chris, welcome back to TV.

Chris Bruner Thanks, Dan, good to be here.

Dan Barnes So, for traders who’ve never used streamed prices in credit, what do they see on their trading desk?

Chris Bruner Bottom line, more liquidity. The stream of liquidity that our institutional clients are seeing, comes from our Tradeweb Direct platform, where for years we’ve had thousands of order books with dozens and dozens of dealers, streaming liquidity into those, mostly out of our size. But in aggregate, it’s over 10 billion of additional liquidity that stream and effectively firm for our institutional client base. So on the user interface, you can see that liquidity when you come to trade. And then interestingly, you don’t really need to even engage with it. If you send an RFQ, you get the benefit of that liquidity automatically added to your RFQ.

Dan Barnes Who’s making markets for live pricing?

Chris Bruner Great question. So across all of Tradeweb, we’ve got approximately 160 dealers on the platform. And it can really be almost any of those dealers are making markets on the stream platform. A lot of them are the same institutional dealers that we’ve had traditionally responding to RFQs, and showing pricing on their institutional platform, where we have 70 dealers on the institutional platform. That means there’s at least 80 or 90 other dealers.

Dan Barnes And how does live streaming fit into the wider system protocols we’re seeing evolving, like all-to-all trading?

Chris Bruner The clients workflow can’t really change. If you’re an institutional buy-side client, you have an OMS, you send an order down to a platform like ours. You really just want to get the best of liquidity on your order you possibly can, if you put it out to a really wide audience. And so what we do with streaming liquidity, is we marry this cloud-like, streaming protocol, to the RFQ protocol, so that the institutional investor doesn’t have to think about where the liquidity comes from. That’s really where I think we come in and provide that value. And we think it’s, if anything, we’re on the verge of all-to-all 2.0. With streaming liquidity, with the ability to take your electronic trades on the all-to-all platform and put them through netting with all your high touch trades. We think there’s quite a bit of advancement still yet to be seen. We think there’s a lot more to go still on the functionality on the all-to-all platform; identifying matches, and ingesting, and just getting more and more eyeballs from a diverse set, not just the buy-side and traditional dealers, but new communities like the one we’re talking about here with streaming liquidity.

Dan Barnes And what’s new in block trading?

Chris Bruner With block trading, we think there’s some really exciting developments and a real need for a technology upgrade in what represents about three quarters of the credit market. Only about 25% is electronically traded, and it’s continuously and steadily growing. We don’t necessarily think it’s going to jump magically to 50 or 75% soon. So, for that 75%, the all-to-all platforms are super beneficial for certain of the trades, but as you go larger, and as you go less liquid, really, these trades are probably not going to migrate to the all-to-all platform right away. So, what we’ve done is we’ve looked at ways we can make block trading more efficient. We started with voice processing, where you might have pre-agreed your trade. And for high grade trades, we can actually get you an electronic treasury execution, because almost every spread-based, high grade trade has an electronic treasury execution, so we linked those two things, and in over 90% of our trades on the platform, in the high grade space, actually have an electronic treasury trade that occurs off the back. And now there’s a lot of subtle detail in the value that provides; the biggest thing being, we always get the hedge done at exactly the price that we do the corporate bond trade. That has benefits for the sell-side and it has benefits for the buy-side in terms of managing their all in yield, which is so important to most of their investment strategies.

Dan Barnes So traders have all these protocols to choose. How do they determine which ones to use?

Chris Bruner We’ve talked a little about transaction cost analysis tools before. That’s one main way that traders are trying to empirically say, ‘OK, what is it really costing me on an average basis to do certain trades?’ ‘And how might I make my execution choices around that?’ Not every client is using these new transaction cost analysis tools. So, I think a lot of it is just getting them a large enough sample of trades, so they get some experience and then helping them, because they’re really the experts at the end of the day. Helping them decide, ‘OK, great, if I can save enough time, I get a similar execution cost to automate a lot of my RFQ, especially now that they’re stream liquidity on them? Excellent.’ Once they decide that’s a valuable channel, we see a lot of them trying to push as much as they possibly can through that, as it just frees themup to do other trades. And then on the other end of the spectrum, it’s much more of a deeper analysis. Fx in portfolio trading, it’s a lot more of an interaction with PMs and traders, and their whole investment process to say, ‘where is the data? How do I ingest the data? Pick and choose what I might want to put in my portfolios and execute for my strategies.’ And then after doing a few portfolio trades, then again looking at the data to say, ‘where is execution quality coming in? What new liquidity is available? Could I just do this via another channel or is it truly new?’ So it’s a variety of things for firms and it’s fairly early days on how people are using the tools and getting familiar with the tools. But we think that there’s a potentially large benefit for the marketplace.

Dan Barnes And so we are seeing increased efficiency as a result of these protocols, so what are the implications for execution quality?

Chris Bruner I think the implications are quite large, potentially, because I think some of the constraints aren’t changing quickly, around dealers’ overall balance sheet usage. It’s changed in the last 10 years. I think what we’re seeing is a case of everyone’s trying to get a lot more efficient, because certain of these constraints are not going away. But the efficiencies themselves, which isn’t just a market structure change, it’s not just we’re all going to trade in dark pools versus using RFQ versus using cloud. It’s a lot more the efficiencies that I think are making a real impact. But I think there’s a legitimate empirical impact to velocity balance sheet usage and then actually cost. It’s OK if margins and average costs come down a little bit, if volumes double. And we’ve seen that in other markets, and we’ve seen that go a lot further than people probably realize it could in other markets, that costs keep coming down, but volumes keep going up, and not everyone goes out of business, but people have to adapt.

Dan Barnes That’s been great. Chris, thank you so much.

Chris Bruner Thank you, Dan.

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