US Credit sees leap in buy-side e-trading capability

Published on 4 April 2019

Electronic trading is delivering better execution at larger sizes and in choppier waters in the US corporate bond market. This is increasing the velocity of trading, adding liquidity to the market. As platforms have evolved to allow automated hedging with Treasuries, electronic trading is increasingly viable even in markets with price volatility. Chris Bruner, managing director and head of US Credit at Tradeweb, explains how traders can take advantage of this evolution, and crucially how post-trade analysis tools are helping asset managers to navigate the range of voice and electronic execution options to become more efficient, while assisting in capturing alpha.

Dan Barnes Welcome to Trader TV fixed income – your insight into the trading climate for professional bond investors, I’m Dan Barnes. Electronic trading is becoming an increasingly viable choice when bond markets get choppy, thanks to better data and trading tools. Chris Bruner, head of U.S. credit at Tradeweb, is going to talk to us about how to engage in electronic trading in turbulent markets. Chris, welcome to Trader TV.

Chris Bruner Thank you, Dan. Nice to be with you.

Dan Barnes Do traders still reach for the phone when bond markets get choppy?

Chris Bruner They do, and I think it depends a lot on the size and the type of trade you’re trying to do. And increasingly, we actually see that you can continue to do electronic trading even in the choppiest of times. And we’ve achieved a high level of automation for the easier, more liquid trades. But participants still need the phone and certainly for larger, less liquid, block-sized transactions and certainly as markets get more choppy.

Dan Barnes And how has electronic trading evolved to enable that?

Chris Bruner The data and the technology to support trading have really seen a significant upgrade in recent years. So, fx the way you distribute your axes as a trader and how you get that information to clients, and the way clients are sifting through that information to help make trading decisions, has seen a significant upgrade, and the market’s been networked up in a fairly significant way. Most traders now have technology on their desks to see all the inquiries coming electronically, and a huge percentage of traders are now using these tools to be able to react to electronic inquiry, at the same time that they’re responding to voice inquiries and speaking to their clients. And so they’ve got a pretty nice set of tools in place to be able to do both voice trading and electronic trading. And the data quality has really been upgraded on behalf of investments from both the buy-side and the sell-side, to help make better decisions about how to trade.

Dan Barnes So we’ve seen market infrastructure, buy-side and sell-side technology all evolve at the same time?

Chris Bruner I think that’s exactly right. And I think another piece is you’ve started to see some integration between markets. So, fx the high grade market in the US, trades have spread to treasuries and there’s usually a treasury trade that has to happen when you trade the corporate bond. And what’s gone on in recent years is, we’ve actually been able to integrate the electronic treasury hedges that happened as a result of corporate bond trade,s so that are completely automated, a piece that used to be very manual and you’d have to effect after you agreed on spread, to what your Treasury to your corporate bond prices.

Dan Barnes And what do buy-side traders need to have on their desks in terms of tools and systems to actually help them take advantage of this?

Chris Bruner Increasingly now, I think they need a set of tools to help them do both voice trading and electronic trading. They need some kind of aggregation of the data internally pre-trade. I think if they’re doing the job well, they have hopefully ways to inform decisions about what’s the best way to get a trade done. So, a large illiquid trade, maybe you want to do that by finding the right person who has an axe live on the system and go directly to them. But then afterwards, there’s new tools that help you actually process those trades, even when you’ve agreed them on script. So, there’s pieces that you can do electronically now that you couldn’t do before, and I think it’s really important as a buy-side trader to have a good awareness of what the tools are that are available, because we’ve seen that, while voice trading is still a majority of the market, the percentage that’s trading electronically continues to rise. And there’s a lot of new technology that’s been deployed in even the last year or two, and so I think staying current and what’s available to you is pretty important at this point.

Dan Barnes How has the quality of data been changing, and what difference does that make to the traders?

Chris Bruner So I think there’s one way data has changed; the quality of it and the transmission of it via APIs and fix protocols, fx, straight into the systems so that people can store it, they can use it, they can analyze it. And when it’s there, they can actually execute immediately off the back of it, as opposed to maybe not being sure on the quality of the data, or where it came from, or did my parser work properly, fx.

Dan Barnes What do you think the actual impact is going to be on investment returns?

Chris Bruner There is a significant and direct impact with the cost, but also liquidity. Velocity can go up, the amount of liquidity that investors can go find for themselves to move risk goes up, and not just because of potential market structure changes, but as much or more because of the technology that’s being deployed, and the analysis tools they have in front of them to make decisions. So we do think there’s a very direct impact to both liquidity and to a reduction in cost. And then what we anticipate would happen from that is an overall increase in market velocity. So, as transaction costs go down, there’s always a balance in this. Principle market makers are still vital to the corporate bond space and affect the majority of the risk on behalf of their clients. And so some of this could impact the sort of pro-notional or the edge available in the marketplace, but at the same time, I think what we’ve seen in many other markets, is they move more electronic, is that the overall velocity goes up and the pie can actually grow.

Dan Barnes Chris, you mentioned transaction cost analysis. How important is that in the decision making process for how traders are going to execute?

Chris Bruner In many markets, it’s become sort of fundamental to the decision making process and helps people make decisions about how they might want to execute a trade. Fx in the equity world, ‘do I use an algo and piece the trade out,’ or, ‘do I go to an institutional block-trading desk?’ We’ve recently been able to roll out those tools in credit, and one of the reasons it took a while longer to roll them out on credit is, we didn’t have great, pre-trade, benchmark pricing, because the foundation of those tools is, where was the market at the time? And in a less liquid marketplace like corporate bonds, a lot of our bonds aren’t trading even once a day. Maybe 70 or 80 percent of the bonds on trades don’t actually trade more than once a day. And so, what you really needed was more of a model-based approach to estimate where we think the market is at the time, and we and others have been deploying those types of technologies, which has enabled us to now offer a transaction cost analysis tools. And I think the goal of these things is not to be perfect and not necessarily to suggest that you’re going to trade large liquidity or where should someone trade. But it’s really to get a real-time estimate that didn’t exist, and so coverage and overall quality are super important to these models. And what we do is we try to take a machine learning-based approach, to keep refining and assessing the errors that come out of the models when we do observe transactions, and then you can continue to improve the model and improve the model estimates.

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

Chris Bruner Thanks very much.

Dan Barnes I’d like to thank Chris Bruner from 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.