As execution habits continue to change, what are the different strategies and approaches that you are observing?
It is interesting how behaviour migrates, and there are multiple answers as to where we are observing a shift in execution habits. However, I think a key area – informed by the kind of volatility we experienced earlier in the year – is the increased adoption of the Request-for-Market or RFM protocol in markets where Request-for-Quote (RFQ) used to be the dominant mechanism.
In RFQ, clients ask liquidity providers to show a bid or an offer, and their direction is disclosed to participants, but in RFM, the direction of the trade is not specified. Therefore, by nature, the RFM protocol minimises information footprint during the auction.
Being a little more private as a protocol, it tends to be working better either in volatile markets or in less liquid markets – where the value of the privacy is higher. So, when markets get a little trickier to execute in, then RFM tends to be more preeminent as a trading mechanism. We have seen the majority of business in emerging markets swaps done on an RFM basis, as the market is naturally less liquid and with maybe not as much size getting traded.
We do see it in developed market derivatives as well, whereby thresholds are considered and after a certain size of risk, the protocol of choice for clients becomes RFM. When the threshold is lower, best execution is easier to achieve via RFM versus RFQ. We also see these protocols really picking up and evolving from one asset class to another.
Looking at the current regulatory environment, what are the key factors to bear in mind for your – and other similar – businesses?
Undoubtedly the MiFID II review, or at least portions of it, which has been highly debated of late in the industry. I would highlight its position on the trading venue perimeter specifically. It is clearly a very difficult problem to solve, because there is a conundrum between the regulators welcoming innovation – which we strive for – and at the same time, ensuring that everyone is operating on a level playing field.
Being a regulated venue provides a ton of benefits for the clients, as they can leave all the regulatory developments to us, but it is very costly. From an infrastructure perspective, the common goal is to make markets more transparent and more resilient. Holistically, the MiFID review is in progress and we do think that it will continue to bring interesting developments for market participants.
I would also highlight another area we are looking at, which is the pilot regime that exists in Europe and is soon to come to the UK around decentralised finance. We obviously pride ourselves on being at the forefront of technology changes, so it is an interesting development as the different regimes begin to consolidate.
What are the main drivers behind the growth of Tradeweb’s Europe and Asia businesses?
As a company, we find ourselves in the middle of a perfect storm of technology advancement, proliferation of data, and regulatory changes that are really pushing more and more wind into the sales of market infrastructure providers like us to increase automation of trading across the board.
One of the biggest drivers is the higher proportion of automated transactions done via our AiEX tool. The growth is happening across asset classes, but we especially see it being picked up a lot faster in markets that only recently became electronified. For instance, there has been greater focus on emerging market swaps in the last 18 months despite the market still being in the early days of digitisation – so there is significant interest and adoption from the clients we are working with.
This ‘perfect storm’ is global, but I believe that the reverberation in Europe is really significant and the continued trend of tech advancement has accelerated the phenomenon. As a business, we are looking at new geographies all the time and try very hard to follow our clients’ direction of travel. For example, market participants are very interested in the yield curve control change by the Bank of Japan and as a result, our Japanese government bond and YEN swap numbers are growing pretty fast.
There are many areas of activity globally that are interesting and given our position in different geographies and markets, we are able to pick up on these trends very quickly. We bring innovation and electronification as the market needs arise.
How has the client base evolved for the business and why?
Tradeweb is quite unique in the sense that we operate wholesale and institutional marketplaces, and in the US, we also have a retail offering. Traditionally, pre-MiFID II, our institutional segment clients were primarily asset managers, central banks and other real money-type players. Since MiFID II went live, we have had a notable increase in engagement and traction with the hedge fund community.
This is a result of the regulatory changes around MiFID II, giving those players a bunch of regulatory demands specifically around best execution and transparency. A venue like ours already had the building blocks they needed to adapt their business to the newer requirements, and this has brought with it a lot of innovation.
Looking at our markets right now, the component of the hedge fund community is higher, and at the same time real money behaviour continues to focus on increased levels of automation. Aside from regulation, the other reasons for this are scale and efficiency. Trading volumes and the scale of execution efficiency is very relevant, as is efficiency more generally, both in terms of cost – managing operational risk – and also the efficiency of best execution itself.
On the sell-side we have also seen an evolution. The European markets have been particularly fragmented, however, where we have observed the most change and the entry of new participants has been in exchange-traded funds (ETFs) and credit. There is a lot of participation of specialist market makers, and their success in ETFs is being replicated in other adjacent markets.
As a business that sits in the middle of the buy- and sell-side, we listen to both of them and try to bring innovation where we can. But without investment from all three components, innovation will be difficult to come about.
Looking at Tradeweb’s initiatives and partnerships this year, which has been the most impactful for markets?
We certainly believe in collaborating with clients, peers and other service providers to drive liquidity, transparency and efficiency in financial markets. Our philosophy is to try and link markets as they become electronified.
For instance, we first picked up on the need to automate some trading functions in the emerging markets space. Then we realised that the best way to ensure connectivity and access to the best liquidity possible for EM clients was to partner with someone like FXall (part of LSEG). The end result was the launch of our FX Swap Workflow solution, a great example of a long-term initiative that has taken a lot of time to fully develop, but in the end will be successful.
In the short-term, however, I would highlight the launch of our iNAV calculation service as the most impactful. I believe it is notable because it sits in between automation, technology advancement and data, which is powering the electronification of markets.
Read more: BlackRock first to adopt Tradeweb’s new ETF iNAV service
It is very interesting because iNAVs provide a level of transparency with a high level of accuracy that was not there before. In fixed income, it is a key indicator that clients look at when they execute portfolio trades. In Europe, there has been significant growth of portfolio trading and iNAVs sit in the middle of it with their transparency benefits, adding a kind of positive loop around fixed income ETFs and portfolio trading.