The management of trading in markets affected by war and sanctions

Published on 11 April 2022

As capital markets have been shaken by the Russian invasion of Ukraine and subsequent sanctions on Russia, along with trade route disruption and shifting investment flows, investment traders have faced unprecedented difficulties in their support for investors, as historical data is no longer viable in assessing risk.

Carl James, global head of fixed income trading at Pictet Asset Management, tells us how his team have helped clients to effect careful investment management decision for credit and rates trading in challenging circumstances.

Dan Barnes: Welcome to Trader TV – your insights into trading for professional investors. I am Dan Barnes. Markets have been shaken by war in Europe and to a lesser extent by central bank rate changes. With me today is Carl James, global head of Fixed Income Trading at Pictet Asset Management. We’re going to be discussing how these factors are actually impacted market activity in terms of volume, volatility and risk management.

Carl, welcome back to the show.

Carl James: Thanks very much Dan. Good to be here.

Dan Barnes: So tell us, how have you seen activity in the market responding to the events over the past month?

Carl James: Well, the invasion of Ukraine by Russia is something that I’m not sure that was built into too many people’s scenarios from a risk perspective. The first in that Friday was very difficult in the sense of people trying to think about that news and take it on board, what are the ramifications, how much contagion they would be? Monday, I think, was quite a difficult day in the sense of people trying to understand what the sanctions meant. ‘Were they on the right side of those sanctions to adhere to it?’ So a lot of the time we had to make sure we had very good communication downstream into our operations department.

We also made sure we had great communication with our counterparts and our platforms that we use. We basically saw a lot of counterparts just walking away, but we also saw a lot of counterparts saying they wouldn’t be at the same level of risk appetite, but they were very clear where they would have that risk appetite. And I think that was particularly useful and it allowed us to compartmentalize those areas of where we want to go with our executions at that particular time.

Dan Barnes: If we then look at the effect on credit rates in emerging markets as different instrument classes, how has volume and volatility been affected across those different asset classes?

Carl James: In the first few days everyone was risk off. There was a real sort of making sure, ‘are we safe?’ in a narrow, financial sense. I think from a rates perspective, markets started to come back quite quickly, relatively quickly. There are elements of the rates world which are still not back to what I would consider standard liquidity.

On the credit side, we definitely saw a huge difference in investment grade and high yield. Issuance stopped. Now there’s a timing issue here, isn’t there? Because there’s a blackout period that we’re going to have to think about coming up to that, so you’ve got companies that are going, ‘OK, let’s take advantage of this,’ in the sense that there is a window of opportunity now that we’re past the initial shock of what was going on out in Ukraine. So I thought that was quite astute by these issuing companies, and I think they’ve been advised well to take advantage of that. And I do think maybe some cash balances have built up. So again, those issuances could be received, well, maybe.

So from that perspective we’re still seeing liquidity at a lower level. And again, it’s about where we can, we’ll look to do these risk trades with the right people. The right people is obviously the idea of, ‘who have we traded with in the past? Who are we seeing actively?’ But also there’s an additional filter now of, ‘who has clearly said to us, we are happy to engage with you in that whatever particular spaces that we want to?’

Dan Barnes: You’ve always been a big advocate of using data to understand pre-trade, at-trade, and post-trade, and how to deliver best execution. In a situation like this, how’s the data and analytics you’ve used held up?

Carl James: We built a database which we can carry up to 700 days worth of data. Beyond that, we put it into the cloud and we can still use it for other purposes. We have direct connectivity with just under 20 houses now that send their axes directly through to us into that database. That’s really the goal that we want to capture.

From the broker review process, we will talk to those counterparts and say, ‘there’s no point in sending us what you’re sending on a Bloomberg page, to everybody. If we’ve got a direct pipe to you, then we will assume that you’re sending your axes that you think are pertinent to us.’ So we need to see that differential. If we see that differential, then we know that what comes into that database and that links directly to the trades that we’ve got, that becomes a very valuable source of information.

We also utilize some inter-operability platforms where we pull all this data together, so actually what we’re doing is, we can actually see where the liquidity lies, utilizing those live axes. So we can see if the market is bid only or offered only in a particular sector. Or we might want to look at a particular issuer and then look across the curve. Or we might just want to look at an individual bond. And we can capture that data at a push of a button.

So rather than waiting for the order to hit us and then doing that analysis, which we can do anyway, what we’re actually tending to do is to be a bit more proactive and analyze that data and turn to the portfolio manager and say, ‘if you need to do the following, we would suggest this is where you’ve got a good chance of effecting the execution, because we can see that live data.’

Dan Barnes: And finally, how would you characterize the way you’ve tried to deliver best execution in this current environment?

Carl James: I think in the equity space they seem to have hung this albatross around their neck of purely price, but within fixed income, what I really like is it’s now widely accepted that the process is part of best execution, and the price does actually have a weighted part of that overall process. And it might be greater or less, depending on what you’re dealing with. So for us, what we have to do is apply consistently what we’ve been doing, so I’m able to demonstrate that we’ve got this wealth of data from the database that we built. We then utilized that into the orders as it’s staging it onto the order management systems so the dealers can see what they’re doing. So there’s a reason why they are going to these particular houses.

So we need to understand, ‘why would we trade with a particular counterpart? Why would we use a particular methodology?’ And if we’ve got that underlying data, that’s a very good piece of evidence. And you could also look at it round the other way and say, ‘what would you do if you hadn’t have utilized that counterparty or if you hadn’t utilized that methodology?’ And I think that’s quite an important element because it becomes a self-fulfilling way of defending that process. When we get to the price, I mean, there were a few days where there was complete dislocation, and I’m not sure that price would have been relevant to look at best execution: it had to be about the process.

Dan Barnes: Carl, that has been great. Thank you so much.

Carl James: Thank you very much.

Dan Barnes: I’d like to thank Carl 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.