The most challenging events for buy-side traders in November

Published on 7 December 2020

November 2020 saw a confluence of risk events. As a result buy-side and sell-side firms engaging in real risk-on activity. Not only was there the US election and the announcement of vaccine developments for COVID-19, but national developments, such as the UK’s consultation around the retail price index (RPI) which is used to calculate inflation increases for pensions and investments, directly affected markets.

Ed Wicks, head of trading at Legal and General Investment Management, tells us how his traders delivered the best outcomes for their investors using FX algo trading, portfolio trading in credit and multi-asset package trading in rates, plus he outlines the real challenges faced in trading the index-linked Gilt markets over the last month.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Today, we’re going to get an update on the trading conditions across November, which of course, was a very busy month with the US election and various government consultations occurring. I’m speaking with Ed Wicks, the head of trading at Legal and General Investment Management, to get his view on how trading occurred across equities, credit and rates, and FX markets. Ed, welcome to the show.

Ed Wicks Thank you, Dan.

Dan Barnes So tell us, over November, what have the trading conditions been like in rates, credit and equity markets?

Ed Wicks There was a lot of anxiety as you went into the month. There were some major events on the horizon that everyone will be aware of. So, you know, we’re talking about the US election, obviously Brexit negotiations, news around potential vaccines for COVID-19, and actually what we saw was quite a clear risk on sentiment as we got through the month. So we saw general dollar weakness, positive price action across equities, within the credit markets we saw a tightening of the spreads. And then even within gilt markets, we saw yields rising a touch higher. So, I think if you take a step back and look across the market broadly, November really was a month where we saw some real risk on activity.

Dan Barnes Was there volatility in any particular market segments?

Ed Wicks There’s been a general decrease in volatility across most markets. I mean, volatility is still somewhat higher than it would be in what you might term, more normal markets. However, that being said, if you look at where we’ve come from, obviously in March, at the height of the crisis to where we are now; it’s fair to say there’s certainly been a decrease in general volatility. Most obviously, if you look at the VIX, you can see that graphically very, very easily.

Dan Barnes Towards the end of the year, especially when investment banks had a very good year, we tend to think that they start to get risk off because they’ve made the money they need to do and that can potentially decrease liquidity. Do you see any change in the liquidity provision between different counterparties in any markets at all?

Ed Wicks Yeah, I think it’s fair to say there’s always going to be a differentiation between counterparties, and some of that will be dictated by bilateral relationships. Some firms will have much deeper relationships with certain counterparties than others, fx. For us, as we come towards the end of the year, I suppose what we’re looking towards is the amounts of cash in the system. So as we come to think about making sure we have the ability to place all of our overnight cash, that’s an important aspect for us to consider. But when it comes to risk provision in the main asset classes, we haven’t seen too much difficulty in moving the positions that we have to move. So, November for us has been, in a liquidity standpoint, very positive.

Dan Barnes Have you changed any of the trading protocols that you’ve been using over this year and nothing standing out for you on that front?

Ed Wicks Yeah, we have actually. There’s a couple of things that we’ve done, some of which we put in place last year. But the benefits we’ve really felt throughout 2020; in FX markets traders have been very much enthused to be working with the sell-side counterparties, and we’ve been moving towards an algorithmic execution channel. So, we certainly increased the amount. We use algorithms in FX. When I look at credit markets, portfolio trading has certainly in the last three to four months, it’s an execution channel that has gained significance for us. And then one of the bigger ones is in rates, OTC rates specifically. We did a lot of work last year around multi-asset, package trading. So the ability to transact electronically in those instruments, LGIM actually was the first buy-side firm to transact using this functionality late last year. But where we’ve got to with it this year is even further, and actually that ability to trade electronically within OTC rates via the map package functionality, has been really beneficial for us. And I think it’s certainly allowed us to trade more dynamically and react quicker to markets as they’re obviously changing.

Dan Barnes Looking at November then, and perhaps across the rest of the year, have any particular asset classes been very challenging to trade and therefore more interesting from a trader’s perspective?

Ed Wicks Where we’ve seen real difficulty or real interest in price action, has been around the index linked gilts markets. And when we come to look at that market, what we’ve seen in November, obviously, is the response to the RPI consultation, and that was very eagerly awaited by both the sell-side and the buy-side coming into that event on November 25th. There was a good degree of volatility around that, as one would expect. So that was an area of real focus for us.

Dan Barnes Finally, how would you say that your team has been delivering best execution in November for your end investors, given all the changes that have been occurring this month?

Ed Wicks What I’ve just seen in the last 24 hours, actually, is our monthly transaction costs. So it’s very timely that you ask that sort of question. And what’s pleasing actually is that as a general theme, the transaction costs that I see for our business, they’re reverting quite nicely towards pre-COVID levels. And so that gives me a lot of confidence in the approach that we take when we access markets. Instruments like credit markets, we’ve seen bid-offer spreads in those markets generally come tighter. I saw some data from the electronic platforms quite recently which showed that we’re almost back to where we were in January of this year. So the market is becoming more normalized and the transaction costs as a result of that are certainly normalizing also. And that’s very important for us. Obviously, it’s one of the key reasons we’re here, is to ensure the best outcomes possible for our clients.

Dan Barnes Absolutely. Ed, that bodes very well for 2021. Great stuff, and thanks very much for coming on the show.

Ed Wicks Thanks for having me.

Dan Barnes I’d like to thank Ed 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.