What are your biggest priorities/challenges in fixed income trading and how are you addressing them?
Dan Veiner: At BlackRock, we’re focused on achieving efficient and safe sourcing of liquidity at scale in a growing AUM environment, maximising the information value that trading contributes to the investment process and utilising technology and data to continually evolve. Our traders are partnering with trading research and data science teams on various projects to evolve the platform in many of these areas. Increasingly, our fixed income traders are partnering with portfolio management and research teams early on in the investment process, and we’re experimenting with trading technology and trading protocols. I think it’s important to constantly question the status quo, and envision how we would design a function or technology if we were starting from scratch.
Across the breadth of the fixed income markets, where do you see the biggest inefficiencies and the most urgent need for change?
DV: Many pick on loans as a place to start, but this is a small fraction of the risk we trade. Stepping back, the industry lacks an elegant solution for safely and efficiently sending orders to banks and liquidity providers (especially for high touch or ‘non-comp’ orders). We are order driven and utilise the Aladdin Dashboard order management system (OMS), but many of our peers either don’t rely on an OMS or trade without orders. This is why there isn’t an elegant solution in fixed income akin to the use of FIX Care lines to trade equities or futures. In my opinion, this is the low hanging fruit where we can take a big step forward in efficiency and operational safety.
How are changes in market structure redefining the way you interact with your sell-side and technology counterparts?
DV: In the repo markets, the rise of electronic request for quote (RFQ) as a trading protocol has been very impactful, paving the way for orders and electronic trading, which we utilise now. In credit trading, the emergence of automated market-making credit algos has increased dealing efficiency dramatically. This has allowed for buy-side auto-ex, which is how we execute the majority of our fixed income trading tickets (but not the majority of risk transacted). As an emergent and cost-effective liquidity vehicle, fixed income exchange-traded funds (ETFs) have been a game-changer, supporting the evolution of portfolio trading in credit. We’re using ‘click to trade’ via FIX IOI (indications of interest) direct out of Aladdin with some counterparties now, which is a meaningful step towards accessing firm-executable liquidity.
How are you using new data and analytics capabilities to optimise trading workflows?
DV: We utilise proprietary liquidity scores and routing algorithms to systematically determine which trades should be executed via our low-touch trading desk and which trades should be executed via our high-touch trading desk. We are conducting ongoing work with our trading research group to develop optimal trading strategies across asset classes.
To what extent is it useful to look to the equities market for strategies/technologies that can help optimise fixed income trading and investment processes?
DV: Certain concepts translate well from equities to fixed income. For example, equity portfolio trading is a 20 year-old protocol, and the data, automation and transparency is at the stage where fixed income trading has adopted it. Bilateral FIX lines and FIX hubs, which I mentioned before, are other ones borrowed from equity. For very liquid, standardised instruments, such as on the run US Treasuries, government bond futures and ETFs, agency algos are important tools in fixed income that were also borrowed from equity.
At the same time, many attempts to ‘cut and paste’ from equity have failed due to structural differences, such as the heterogeneity of bonds and rates derivatives. An example of this would be credit or rates dark pools that have had to get very creative to prove relevance in order to overcome the difference between agency equity trading vs OTC fixed income trading.
What do you like to see from fixed income brokers, service providers and technology vendors to make the fixed income markets easier to trade?
DV: Firm streaming prices in fixed income is an evolution that will dramatically improve pre-trade transparency. The electronic trading platforms and clearing houses should continue to add supported instruments. For example, zero coupon swaps and inflation swaps can now be cleared effectively in GBP, but open-ended RFQ inquiry over electronic trading platforms in rates are limited. Often we end up having to fix the coupons on swaps and use compression tools to be able to overcome the limitations that exist with quoting new swap risk packages.
How and why are skill sets changing on the fixed income trading desks of large buy-side firms?
DV: Coding and technology skill sets are increasingly becoming must-haves on fixed income trading desks, given the need to build out analytics and trader tools. At the same time, sector and product expertise are paramount in terms of high touch trading fundamentals. Product knowledge is an essential ingredient to maximise trader value in the investment process. In order to adapt to changing market structure and liquidity conditions, both dimensions are important to a fixed income trading desk.
How does TCA need to evolve further to better support the needs of buy-side fixed income trading desks?
TCA is an area where fixed income trading should take the lead from equity trading, at the same time accounting for the fact that fixed income is primarily an OTC market. As transparency and data quality increase and become more available, TCA should evolve to measure statistically versus a whole host of benchmarks, including mid at time of execution, mid at time of order raise, etc. This is a non-trivial exercise, especially across fixed income sectors that are more opaque, such as mortgage pools, forward swaps, etc. With the evolution of fixed income TCA, the buy-side will better be able to measure costs and trends to make more informed investment decisions, and adjust trading tactics accordingly.
This article was originally published in the FILS in Philly Today magazine, produced by The TRADE, which was distributed to attendees of this year’s Fixed Income Leaders Summit USA conference.