The big changes in trading behaviour for 2024

Published on 7 June 2024

Get a 360 degree view of US markets and trading behaviours this year, with Michael Daley of T Rowe Price, Mike Sobel of Trumid and Ryan Raymond of LGIM USA.

With growing electronification across credit, buy-side traders are able to execute orders more effectively than ever before. Portfolio trading is booming, and automated trading is being directly impact according to buy-side traders.

If traders have the right access to data and analytics they can get far better execution quality through a combination of dealer relationships, electronic trading platforms and pre-trade information.

Interview Transcript:

Dan Barnes Welcome to Trader TV your insights into institutional trading, I’m Dan Barnes. Credit traders in US markets are rapidly evolving the way they execute orders into the market. Here to discuss that trend are Michael Daley of T.Rowe Price, Ryan Raymond of LGIM and Mike Sobel of Trumid. To start with, what are the dynamics impacting market liquidity in credit today?

Mike Sobel Liquidity in the marketplace this year has been quite strong in ways and for reasons that we think are sustainable. So Trace ADV is up 20-25% versus a year ago and that is definitely above trend growth. I think we’re beginning to see the increase in velocity or turnover in the U.S. credit asset class that we’ve been kind of hoping for, waiting for, I think reasonably expecting. And that comes from better tools than we had a few years ago. Tools to access the market, more transparency, more efficiency, data-driven decision-making, and more participation from kind of non-traditional market players. Systematics are playing a bigger role in the market. Retail is playing a bigger role in the marketplace.

Ryan Raymond I think the obvious answer is portfolio trades. We’ve been talking about these for years, but really this year is when we’ve seen broad adoption across all different kinds of counterparties and with that different styles of portfolio trades as well. Right now they’re about 10% of Trace volumes, but it really feels like it’s higher than that, and we’re growing, and I expect this to be a bigger and bigger part of what we do. When I think about how we react to portfolio trades at LGIM, we look at what are the X’s on the follow and how can we best suit our clients by executing portfolio trades ourselves.

Michael Daley I think we see now more of a focus on thinking about within credit, getting exposure to certain risk-based factors, particularly among parts of the curve. We’ve seen an uptick in curve-based extension trades, shorter-type trades. I think more importantly, over the last several months, an uptick in solving for optimization-type trades in the market where even clients are going to dealers with a set of constraints, looking for a risk outcome that they’re trying to achieve, and having, to a large degree, dealers trying to solve for that. So I think we’re seeing a growth in sophistication among clients.

Dan Barnes If you’re going to optimize portfolio trading, what do you need to do in terms of analytics and dealer relationships?

Ryan Raymond So the analytics are very important for us and the portfolio trades. That’s how we can measure our transaction costs. One of the things we like about portfolio trades is that we have all those analytics easily accessible that we can hand to portfolio managers and ultimately clients. When we think about the next portfolio trade, pre-trade analytics is becoming more and more of a focus, not just for us but for the whole market. And that comes down to a few things. One is where do we think execution will be to determine if we’re going to trade or not? And then two, how can we optimize a portfolio and how can we solve for lower transaction costs, higher spread, higher yield, or some combination of all three of those in order to find the best outcome for our client?

Michael Daley So I think really it’s thinking about which dealers have the best ecosystem to achieve the risk objective, looking at the pre-trade data to inform the decision-making process kind of point in time, looking at liquidity stacks via aggregation tools to think about who at that point in time is probably best set up to do this trade.

Mike Sobel Our market is a relationship-driven market. It always has been and always will be, but the ability to leverage data, I think, to best identify and then engage with the most suitable counterparties at that point in time is an enhancement of the dealer-to-client or the general relationship-driven nature of our market. And I think everyone’s beginning to understand that and appreciate that it really is mutually beneficial to everyone in the marketplace to be able to see more flow in the thing that they’re particularly good at and best position to do at that point in time.

Michael Daley I’m really happy you brought up the idea of data and again, kind of the pre-trade side of things, but I think importantly there’s a focus on, you know, a migration away from individual Cusip or ISIN-level data metrics and more thinking about the ability for dealers to facilitate overall thematic, risk-based or factor-based liquidity.

Dan Barnes And how is automated trading affecting execution quality and the market more widely?

Mike Sobel Using technology to enhance efficiency at the kind of lower value-add portion of the food chain is as important in bond trading as it is, and probably any other industry. As I think liquidity expands, but also changes a little bit, there are a range of trading protocols that we’ve talked a little bit about. We’re seeing smaller trade sizes as part of that protocol expansion, particularly in RFQ space. So the ability to chip away at a trade using a rules-based algorithm and some third-party price, that makes sure you know that the price is the right one that you’re executing at, while the traders are off thinking about more important things like portfolio optimisation and what risk factors or specific credits or sectors they’re trying to change exposure to across the portfolio, that’s really valuable.

Michael Daley Thinking about the growth of the RFQ as a whole, when liquidity can get strained and the buy side stepping in to price that risk. If you have automation in place or some sort of rules-based approach where it becomes a low-touch proposition for the trader, where up to certain thresholds and RFCs that are coming out, you can have rules in place that are auto-responding to that RFQ, that becomes pretty compelling.

Ryan Raymond So the more we can automate and the more that we can take off of our plate, that can really help us focus on the places where we can add value. Dealer relationships, trader relationships, trade execution for blocks. And then also, frankly, looking at analytics and data around a number of issues so that we can become better traders.

Dan Barnes So how are platforms supporting traders in terms of getting better execution and supporting these different trading protocols?

Ryan Raymond I really see the platforms taking the forefront in terms of a lot of these pre-trade analytics. So I have the access to all of my portfolio trades, but I don’t have access to everybody else’s. If a dealer can use that information to help inform where a trade will likely execute before I put it to the market, that’s helpful. If the platform can then take the next step and say, oh, how can we optimize your list to solve for transaction costs or spread? Then it’s helping me come to a better solution for my clients. That’s really powerful. There’s a lot of data out there that we have, but the platforms have more using that to come up with a better portfolio, which is really helpful.

Michael Daley When thinking about different types of platforms. It’s the suite of offerings or products that the platform as a whole will offer, right? It’s not just RFQ. RFQ, in a lot of ways is just a commodity, right? It’s available everywhere. It’s what else is the platform offering in terms of the pre-trade analytics, the Post-trade analytics and also the other liquidity protocols that are across the platform, like you mentioned, swarms and the growth Trumid, the growth of RFQ at Trumid, portfolio trading, the pre-trade side of things there is growing exponentially. All of that factors into our decision-making in terms of which platforms to use, its which offers the best product offering as a whole to the end user.

Mike Sobel Efficiency, transparency, and access all lead to increased liquidity, and everyone benefits from that. With every passing quarter and year, there is more receptivity to and demand for electronic trading tools, data, more protocols, and enhanced protocols. So the desire to engage the market in this way is as high as it’s ever been. Connectivity is really important. Every client has a unique workflow as an idiosyncratic, bespoke way that they do business, and they have similarly idiosyncratic tech setups from the other OEMs and EMS and vendors that they use to their internal proprietary architecture. Everyone’s setup is different, and it is the responsibility and we at Trumid think opportunity for a platform or for a venue to be agile and dynamic and collaborative and figure out how for each institution can we deliver a suite of protocols that work within their kind of needs, in their workflow and their constraints and their existing systems, to make sure it works for everyone.

Dan Barnes Guys, that’s been great. Thank you so much.

Michael Daley Thank you.

Mike Sobel Thank you.

Ryan Raymond It’s been a pleasure.

Dan Barnes I’d like to thank Michael, Ryan and Mike for their insights today, and of course to you for watching. To catch up on other shows, including Trader TV this week at 6:45 a.m. UK time every Monday morning go to Trader.net.

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(trading behaviour, trading, 2024)