As more players and diverse trading options have stepped into bond markets, the benefits have been reaped in fixed income liquidity provision, which in turn has delivered positive conditions for the buy-side.
For panellists at the Fixed Income Leaders Summit on Wednesday, electronification and automation in recent years has helped to drive this growth, and non-bank liquidity providers have increasingly gained space in this sector, as well as a notable return of second and third tier banks to the market.
For the buy-side in particular, this has delivered benefits overall, despite occasional sector-specific stress, and as Lars Salmon, head of trading, fixed income and FX at Fidelity, explained: “So we’ve been for a while, and in many ways still are, in a Goldilocks period, which is very positive from a liquidity point of view, and that has led to great conditions generally for the buy-side.”
He also added: “There are of course periods of stress, but on the whole provision has improved. There are also many more options to access liquidity, whether that’s protocol or instrument wise. But choice also comes with challenge, such as integration on the tech side.”
Read more – Liquidity is in the eye of the beholder
The notion of ‘choice coming with challenge’ was a recurring theme throughout the discussion, and was also echoed by Nisha Pindoria Brown, senior EMEA credit trading at BlackRock, who referenced key drivers of market evolution, including the expansion of algo trading over the last decade, and a hybrid approach between human traders and algos.
“There have been periods of stress, but all these things ebb and flow in terms of market players coming back into the market having retreated and building up credit again,” she asserted.
Business as usual?
Despite this however, Pindoria Brown also went on to indicate that while at a headline level, resilience and growth appears strong, the extent of this success is perhaps not as evident in the figures.
Specifically, she indicated that from the sell-side perspective, tools such as portfolio trading are not leveraged as much as the industry may think.
She added: “In terms of portfolio trading, this tool has developed over the last five years and now we talk about it a lot. However speaking to the banks, their overall volumes accounts for 15% of portfolio trading, but 85% is elsewhere. So there’s still an element of relationships being important. As much as these tools are extremely useful, are they just becoming business as usual?”
However, for Salmon, having these capabilities in your toolkit is still essential for any trader, to ensure any market complexities or volatility can be navigated effectively.
“At the headline level, things look great and have generally been resilient, but that doesn’t mean we can’t have stress and hence liquidity issues in certain sectors of the market,” he commented.
“That will always remain the case. But as a sophisticated investor you want to make sure to have access to as many options, i.e. trading protocols and instruments, as possible to give you the options to choose the appropriate one for a given scenario.”
Volatility sparking debate
Discussions around volatility also raised the question around whether desks should be hiring more junior, skilled traders, or implementing AI instead – a debate frequently surfacing across the industry.
For Salmon, AI lends its benefits to the age-old build or buy weight in, since, as he explains: “You also want to make sure that you have visibility and integration of as many relevant data points as possible which, combined with the ability to have choices in execution protocol and instrument, will provide you with a higher probability of making the right investment and execution decision.”
Elsewhere, Pindoria Brown emphasised that the value of junior people on the desk should not be underestimated, and providing them with the right skills to succeed is key to achieving strong execution and liquidity access.
“We do need adequate and proper training for junior people on the desk. Having people with experience with good training and knowledge of the foundations of how we do our business is essential to continue. AI is changing things rapidly but that skill of being able to trade something in a volatile market that is moving very quickly and finding liquidity pockets where they may not have been able to – that is essential.”