Fireside Friday with… Tradeweb’s Lisa Schirf

The TRADE sits down with Lisa Schirf, global head of data and analytics at Tradeweb, to discuss some of the key ways the industry is set to advance, including the continued evolution of fixed income markets, the impacts of AI in electronic trading and the benefits of using benchmark closing prices.

How can data and analytics be used to further modernise fixed income markets?

Before answering this question, let’s look at the key drivers transforming fixed income markets. First and foremost, the pace of electronification has been growing rapidly. Looking at trading activity on our platform alone, average daily volume in 2024 across Tradeweb Markets was 55.8% year-over-year, and overall volume processed on our platform now surpasses USD 2 trillion each day, which is really incredible. Secondly – and partly due to an increase in passive investment strategies – there has been a rise in portfolio trading, where a basket of bonds can be traded in one go with a single counterparty. Furthermore, when you look at the regulatory environment, there has been a wider push towards more transparency.

Electronification has led to digitisation, which in turn has spurred the growth of fixed income markets. This has led to more data being available, which in turn helps boost liquidity and subsequently more trading, and the continuation of this upward cycle of growth.

When we think how this data can be used to further modernise fixed income markets, we look back at our long track record of collaborative innovation with our clients. We keep asking ourselves how do we find new ways to advance trading and help to solve the problems they may face.

A good example of this approach is our Trade at Close functionality. Our clients told us they wanted to be able to execute trades when markets closed, but they needed a benchmark rate in order to do that. Since we had partnered with FTSE Russell in 2017 to take over from the UK DMO the calculation and publication of the official closing prices for UK Gilts, we were an obvious partner to deliver a solution. We have since launched benchmark closing prices for US Treasuries and European government bonds, and we have also expanded the methodology for UK Gilts to include bid- and offer-prices.

In the US, another pain point we solved for clients was the inclusion of less liquid securities in their portfolio trades on the platform. Before incorporating them in their basket, investors needed a price for every line item in that portfolio. By leveraging our Automated Intelligent Pricing (Ai-Price) tool, which uses advanced AI techniques and machine learning models, we were able to predict the price of a security based on information available on our platform, as well as from a number of public sources. As these less liquid securities begin to be included in portfolio transactions and trade, it leads to an uptick in liquidity from these discoverable prices.

Lastly, in Europe, there was growing demand from institutional clients for real-time Indicative Net Asset Values (iNAVs) for exchange-traded funds (ETFs). They enable investors to efficiently evaluate their positions, make better-informed trading decisions, and enhance their transaction cost analysis (TCA). So, in 2023, we partnered with BlackRock to deploy our iNAVs across their entire iShares ETF suite in Europe, using real-time prices from our trading platform. We now run over 900 different ETFs simultaneously, providing intraday indications of an ETF’s value based on the market price of its constituents, thus creating a more immediate and realistic view of the ETF market at any given point in time.

These examples are the key pieces that Tradeweb has built into our toolkit for investors to help to modernise fixed income markets.

What are the most impactful changes AI is making on electronic trading, and markets in a wider sense?

First, let’s separate out the traditional AI that is linked with machine learning, and the more nascent generative AI that has been proliferating in recent years. We have leveraged AI for building several of our pricing models and creating predictive execution algorithms, as well as to predict volumes on the platform. These tools have become more sophisticated, more precise and used more broadly in the industry.

Meanwhile, generative AI is largely being used as a productivity enhancement tool, with one of our largest use cases right now being code writing. We believe we may see that area broaden to what’s called agentic AI. These are tools that are built for a specific purpose and help automate what was previously more of an administrative function. We are only at the tip of the iceberg for how generative AI tools will be used in the future, and there are a lot more use cases that we are exploring.

It is important to note that these tools are not perfect. They can help with a lot of administrative functions, but they can sometimes hallucinate and produce incorrect outputs. There are ways to decrease that and make the models more precise and reliable, but that takes work and time experimenting as well. Overall, we are seeing the democratisation of information and access to that information. These tools make it easier to get not just data, but information too. But, we should bear in mind that although AI is an incredibly useful technology, it is only as good as the data that feeds it, so having high quality data is especially important.

What are the main benefits of using benchmark closing prices?

It is broadly understood in fixed income markets that evaluative prices lack precision. Prices are a really basic thing in the industry; they are part of the plumbing that keeps everything going. It is crucial that market participants have access to benchmark closing prices that are both accurate and reliable. The Tradeweb FTSE Benchmark Closing Prices serves as key market indicators and risk-free benchmarks that have been built in accordance with the EU and UK Benchmark Regulation and the IOSCO Principles for Financial Benchmarks.

We have a fully disclosed methodology that is published on the FTSE Russell website. Tradeweb is the calculation agent and FTSE Russell is the benchmark administrator. Their role is to verify that we did everything we said we would do. Having that third-party validation is really important to ensure that all the necessary steps were completed correctly.

Our prices are created out of actual streaming quote data from the Tradeweb platform. They are fully automated, so there is no human judgement determining what they should be. In FASB Fair Market Value regulation, specifically FASB 820-10, a Level 1 price has to be created out of quoted data from an active market. We understand from several market participants that our prices qualify for Level 1 status under that regulation, which is an important differentiator from evaluative prices that would not be eligible for this distinction.

We also do extensive back testing of our prices and can produce quantitative measures of how close these prices are to actual trades that occurred in the market at the time of the close. This additional data, coupled with the rigorous information that we can provide on them, can help participants who are regulated under Rule 2a-5 from the US Securities and Exchange Commission (SEC) to comply with providing greater detail on why the prices they are using are actually of high quality and appropriate for their use case.

Other benefits of our benchmark closing prices is that they can be used as reference rates in derivatives contracts, and can also be used for investors’ trade-at-close strategies. Moreover, as the prices are derived from actual real-time data on our platform, there should be a very minimal difference between what was actually occurring in the market at the close, and where the ending closing price is. This helps market participants, especially portfolio managers, to reduce both the noise in their portfolio and in their portfolio tracking error overall.

How exactly does publishing these prices 15 minutes earlier positively impact participants as regards their portfolios and trading strategies?

Expediting the publishing time of the Tradeweb FTSE UK Gilt and European Government Bond benchmark closing prices is a really exciting development and a significant step in further expanding our benchmark pricing capabilities to meet growing client demand. It enables market participants to complete their end-of-day trading strategies earlier, mark their books faster, and update their risk positions and portfolio valuations earlier.

This development is a reflection of Tradeweb’s ongoing commitment to enhancing our modern fixed income toolkit for institutional investors worldwide. By amplifying the information available to fixed income market participants, we aim to bring more transparency and efficiency into our space.

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