How to trade in turbulent emerging markets

Published on 16 August 2018

How to trade in turbulent emerging markets? Using heatmaps of liquidity and all-to-all platforms has helped traders handle the recent volatility in emerging markets, says Chris Perryman, senior fixed income trader at PineBridge Investments, while Angelo Proni, head of new markets at EuroMTS says better data drives better results. Government bond data supplied by MTS.

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Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. In August’s show, we’re talking with Chris Perryman, senior fixed income trader at PineBridge Investments, about the opportunities that traders and portfolio managers found in choppy, emerging markets recently. And with Angelo Proni, head of new markets EuroMTS, about the data and technology support that emerging markets traders need. Monthly, government bond data is supplied by MTS. Chris, welcome to Trader TV.

Chris Perryman Thank you for having me.

Dan Barnes How would you characterize the trading climate for the last quarter?

Chris Perryman It was challenging. Volatility ticked up quite dramatically. And for us, what we notice is the banks in EM space particularly, withdrew liquidity fairly quickly. So, bids actually disappeared, and that’s a theme I think has been prevalent for a period of time, but in volatility, you see it more. I mean, it’s not hugely different to my experience in general, but what we have seen is a completely bidless market in certain illiquid bonds, which for us provides a challenge, but also can provide opportunities. We have struggled a little bit in that sense. The other opportunity that we’ve noticed around that is all-to-all platforms and other sources of liquidity opening up to people, so for us, the volatility has certainly spiked. You’ve seen extreme moves on headlines, so 10-20 point moves, whereas historically that may have been a smoother process with the banks wanting to take risk and having capital to put towards that. So, yeah, it’s been a challenge.

Dan Barnes That’s interesting. Thanks very much. And so from the trading desk perspective, what does that look like in terms of bids, in terms of spreads, liquidity data?

Chris Perryman For us the liquidity side of things, the information available externally is quite sparse, so we’ve had to provide our own internal measures of liquidity. And what we’re dealing with within the EM space,  what you’re finding is the banks no longer are a broad brush of offerings, so you have to find the niche. There’s a much more bigger fragmentation of the market, so you have to understand where liquidity is provided and who is the best within certain areas, certain niches. It can be down to country and it can be sector-specific. For us, the skill set is to create databases, create heat maps of who’s actually involved, who’s actually trading. And that’s definitely the change for us; the amount of data that we’re handling has grown exponentially in the last three years. And last year, you didn’t see the volatility as it was a very one-way market. But this year, with the volatility, what we’ve benefited from is having that set up where we can understand and have that heat map of who actually trades. Because what you get is occasional participants and when the volatility comes, they just disappear.

Dan Barnes That’s really interesting. And does that mean that you have to bring new brokers onto your broker list? Does it mean that you have to engage with different sets of participants or are these relationships you have already established?

Chris Perryman So for us, I’d say in a liquid space which EM comes, into we have expanded our list. I think in a post-MiFID II environment, what people were anticipating was the broker list to become shorter and people to try and scale up their trades, and I think actually that didn’t happen. So for us, we anticipate that in illiquid markets, what we’re looking at is not just traditional relationships with banks, because I think the big benefit for us from MiFID II, is that research is now completely separate. So there’s no stick, no hand, no carrot to sort of offer us in terms of, ‘oh, you have to trade with us to get X amount of research’ – that’s just gone. So, now what we can look at is brokers, we can also look at all-to-all platforms, and I think the electronic platforms have probably moved on to a level where they’re interesting, and volumes through them are actually getting interesting now. So for us, that’s another liquidity source that we need to be tapped into and look at.

Dan Barnes So give us the scenario of what’s been happening in the markets. What sort of risks and opportunities have there been then for sharp traders?

Chris Perryman So for us, the way we’ve set up our desks, we have a combination of quant and qualitative skills. And I think that’s the mindset you need to go into this market to fully take advantage of it. So firstly, you need to collect all that data and information available to look for opportunities. The challenge and the risk is if you become too reliant on electronic trading systems, if you become too reliant on RFQ (a request for credit), what can happen is what was a liquid bond becomes illiquid and you trade it in a very bad style for that market, so you can give up lots of information and you receive a bad pricing point because basically the information is out there. And so historically, that market might have traded  ten-by-ten, but actually there’s been a headline and you shouldn’t trade that electronically at all, and you should be working more quietly or using different tools. It’s a balance of using the electronic tools that are available, but also still having that qualitative skill of an ultimate trader, who feels and understands the market based on information that they’ve gathered. And so you have a decision tree to make, so is it liquid? Is it illiquid? What does that imply in terms of systems and people that you engage?

Dan Barnes And so you mentioned trading ten-by-tens, so that’s the size of the offers, the bids and offers in the market?

Chris Perryman The perception of liquidity is measured really by frequency of quotes and the size of quotes. So is everyone bidding it or iseveryone offering it? Or is it to a market or do we call to a market, so bids and offers are there. But what we have to have is the skill to price risk. So where do we want to take the risk at? And that’s a skill that buy-sides are building up. For us they’ve gotten a bit older, got a bit of gray hair, so my new guys have learned that skillset from me; so, the relative value, measuring where this bond should trade etc.. In a market environment, where everyone’s pulled their prices, and you go on to the all-to-all platform and you are going to be the price, so it’s a case of how confident are you in that level? Are you correct? And the advantage that you can take with that is, if you’ve set the right price you can get midmarket or even better, if you’re the only person out there wanting to take risk in that bond.

Dan Barnes What ultimately is the outcome for the investor if these things are brought together effectively?

Chris Perryman So one of our stated goals as a trader in my firm, in my comp is to contribute to returns. So, you know, the focus for all of us – and we very much feel a part of the team, be it an analyst, a trader or a PM, we’re all the same – we need to contribute to the ultimate goal of giving the best returns possible to the investor. And I think with this information, with this new data, what you can create is advantages that enable you to generate better returns.

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

Chris Perryman Thank you very much.

Dan Barnes Next, we’ll speak with Angelo Proni, head of new markets at EuroMTS, about the data and technology support that traders need when engaging with emerging markets. Angelo, welcome to Trader TV.

Angelo Proni Thank you for having me.

Dan Barnes So when we look at the data requirements for firms trading into emerging markets rather than, say, investment grade in developed markets, what sort of data and technology support do they need that’s different?

Angelo Proni Well, I think they probably need the same kind of data and trading support that they would get from more developed markets. The trouble is that in emerging markets, that product is simply less available and you know, both in terms of quantity and quality. Just to summarize what MTS does; we organize electronic markets for fixed income instruments, and we are designated by nearly 20 different governments around Europe and the rest of the world, as a designated electronic platform for the primary dealership programs, which means that primary dealers commit to quoting and making a market on our order books consistently, and are measured by the DMO’s on how they perform that way. Now, the consequence of that is that, that activity produces data, whether real time or historical, about price discovery, which is the tools that investment managers need to make informed decisions, whether on a day to day basis as the market unfolds during the trading day. Or for analysis, and in that respect, they need access to historical series, which they tend to use to feed into their algorithms or produce algorithms based on what they see on the historical data.

Dan Barnes Okay, thanks very much. And so if firms are trying to look for liquidity based purely on the bilateral relationships they have, what sort of challenges can that create in terms of access to data?

Angelo Proni Well, clearly they don’t get a 2nd, or a 3rd, or a nth opinion on a price that they’re given from a dealer or a broker. So obviously, the overview that they have of the market and the price discovery in the specific markets, instruments will be limited to to a less than optimal number of sources for those prices. Clearly, if instead you have a trading venue that can collect price making from dealers that compete with each other on the venue, and those prices, albeit in anonymous form, are made public via real-time, data products. Obviously, that democratizes the process of price discovery for the buy-side.

Dan Barnes And so, what does that mean in terms of their access to liquidity when they’re using electronic platforms?

Angelo Proni If an investor uses an electronic trading platform, and typically, they will be using electronic trading platforms that function more on a RFQ trading protocol, beyond the opportunity to ask more than one dealer at a time for a price simultaneously, they will also, at least for the markets that MTS covers as interdealer markets, they will also see the real-time, executable prices that are made in that market. They know where the wholesale market is and where that level is, and that clearly gives them the kind of information that puts them in a fair negotiating position when they receive a price back from their dealers. So even beyond their relationships with the dealers via an electronic trading platform, if they’re dealing on the phone and they have the interdealer, real-time price available, they got a better chance of knowing that they won’t be taken for a ride.

Dan Barnes Absolutely. So the trading desks have better access to data, potentially better access to liquidity as well.

Angelo Proni That’s right.

Dan Barnes What does that then mean for the investors who are putting their money in the funds that these traders are acting on behalf of?

Angelo Proni Well, the end investors will ultimately enjoy the benefits that their institutional investor will receive, i.e., having a more informed view of the market, because the sources of the data that they’re using to make their decisions, are more reliable, more varied, and of higher quality. Particularly in the interdealer markets where the prices are executable, and therefore, they are prices made by the dealers with skin in the game vis-a-vis their peers. And therefore it’s not ‘the talk ischeap’-kind of price, it’s ‘put your money where your mouth is’-kind of price.

Dan Barnes So, genuine, executable prices?

Angelo Proni And as I said, central limit order book and therefore that they are bound by.

Dan Barnes That’s great. Angelo, thank you very much.

Angelo Proni Pleasure, thank you.

Dan Barnes I’d like to thank Chris Perryman of PineBridge Investments, Angelo Proni of EuroMTS, for their insights into trading emerging markets this month, and of course, MTS for providing our government bond data. Thank you for watching and to catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.