In conversation with… Dwayne Middleton

Laurie McAughtry sits down with Dwayne Middleton, global head of fixed income trading at T.Rowe Price, to discuss how he approaches the challenges of volatility, liquidity and stability in today’s unique trading environment.

What is the structure of your team, and how is your desk made up?

We are a global trading team with team members in Baltimore, London, and Hong Kong. We trade the entire spectrum of FI and FX asset classes across cash and derivative instruments. We have market structure and data analytics members that enhance the value proposition of our trading desk. We are building off a simple concept that an idea can emanate from anywhere. We spend a lot of time trying to democratise communication channels to increase diversity of thought and explore different approaches to arrive at the best outcome for client portfolios.   

What makes T. Rowe Price’s trading desk unique, and how has it evolved over the years? 

While I have only been at T. Rowe Price just under three years, I have been impressed with the homegrown ‘Trader 2.0’ talent that has been cultivated at the firm. Robust interaction between portfolio managers, research analysts, and traders is essential for a fixed income platform to deliver better outcomes for clients. The FI traders here are active contributors in our investment meetings, bringing insights into the markets. The China property volatility that occurred over the last 12 months is an example of how our Hong Kong trading team was vocal and provided detailed commentary across the investment platform.   We are building a culture within FI trading that emphasies a growth mindset and we promote the concept of psychological safety, so the team feels that ideas flow freely.  The best meetings take place when I’m not doing the talking. 

How do you see the role of the trader evolving? 

Pre-global financial crisis you almost had a combined PM/trader role. Traders were heavily involved in the investment process, it was viewed as a career path. Post-crisis, given all the challenges the broader industry was facing, a lot of tasks that weren’t directly trading-related got pushed down to the desk. If you think of it as a three-legged stool between trader, research analyst and PM, traders in my opinion became a distant third within that grouping. With all the central bank money that came into the financial markets, there really wasn’t enough volatility for traders to be part of that alpha engine. A lot of it was related to the research side, the growth of go-anywhere portfolios and so on. 

What Covid brought back in was that level of sustained volatility, and so the firms that had centralised trading desks that were integrated within the investment process were much better able to navigate those pockets of volatility. Then in 2022, we saw volatility right out of the gates as more macro, geopolitical and risk influences came into the market, and the trading desk became front and centre in investment meetings again, bringing liquidity back into the conversation. People wanted to hear the opinions of the desk again, they wanted to hear from our EM traders, our rates traders in terms of risk pricing. 

Today, we are seeing an industry-wide shift in the table stakes requirements of entry-level fixed income trading roles. Quality FI traders today are more skilled and must understand portfolio construction and research, and they must become adept at price decision-making, often without complete information. Volatility is the friend of the trading desk, and the value proposition of having integrated trading within the investment process has been evident this year.  

We’ve evolved into Trader 2.0 and we’re moving towards Trader 3.0 in terms of the needed skillsets. Fixed income has always been a quantitative-oriented asset class. There’s obviously been a big push for coding skills, and more diversity of thought versus the traditional finance majors coming into the industry. I believe data literacy in terms of the ability to see trends in datasets and make value added decisions from that kind of analysis is an even more important skillset. But diversity to me is not just about gender and race, though those are important, but diversity of thought, different perspectives, different backgrounds are equally important. You make better decisions when you are more inclusive within the team. We need people with outside interests – I think you’re better at your job if you’re able to take a step back and recharge – that brings focus and clarity to your work, and you are able to solve problems better, compared to a cluttered mind concentrating on six screens at once. That’s why interoperability is so important. If you can declutter a trader’s workspace, and only push to them the relevant information for a particular risk trade, they are going to make much better decisions. 

Our desk is evolving with the framework having an in-depth understanding of the objectives for client portfolios and tying that back to trade execution and collaboration skills. We need to have a dual mindset, one with an emphasis on growth and learning, the other with an emphasis on being pro-technology. 

What were the top investment trends you saw in 2022 – what decisions were you most proud of, in terms of your own trading strategy and execution? 

We have seen a return of sustained volatility across the broader FI asset classes, a Fed hiking cycle, and macro factors influencing the risk transfer as opposed to single-name asymmetric risk factors. Since I joined in 2019, the team has embraced new trading protocols and expanded relationships across dealers and trading platforms. We encourage information sharing and breaking down silos so that ideas flow freely across the platform. 

Two trends that have accelerated in 2022 are portfolio trading and the use of macro portfolio products to buy and sell risk. Portfolio trading was a trading protocol that, after some thought and evaluation, we embraced in fixed income because we believe in certain situations it affords us the opportunity to achieve the best client outcome. The use of macro portfolio products has grown steadily at T. Rowe Price. We have expanded our use cases from CDS indices to options on those indices, and options on the credit beta ETFs to thematic decompression trades in credit markets. We have expanded our tool kit in the IRS space as well. Flexibility has been beneficial for the FI platform. 

When I think about the value proposition of the desk, there are both quantitative and qualitative measures. The qualitative were – are the traders picking the opportune times to move a block of risk. The quantitative is more in terms of dealer wallet share – which dealers are performing best? With the price inputs that are coming into the platform, which of our traders are making the best price decisions? Are we moving risk at the most opportune time and getting the best client outcome in those situations? 

One change we made recently was creating a head of FX trading. Given the Russia/Ukraine situation, having a person who led that effort was important. I think we were ahead of managing FX in that situation, and we wouldn’t have been as successful if we hadn’t already put that in place. 

What do you see as your key challenges going into 2023, and what plans have you put in place to address these? 

Data and technology stack modernisation are the major focus areas here for our platform. On the data side, we are bringing more options for the different asset classes we trade and looking to share that across our platform. We have partnered with some innovative companies that have a more tech-oriented approach to the asset class than some of the incumbents. We recently adopted FlexTrade as our EMS for the platform. For us, the EMS is much more than the point of execution in FI markets. We believe the tech engineering prowess of FlexTrade, its open architecture approach and the connectivity options the EMS will bring to our FI investment platform will be beneficial for our clients. 

We have a derivatives solutions team within global trading; the result of their hard work and partnership with the FI trading team has been beneficial for clients given the growth of synthetic credit products as risk transfer vehicles, which have had massive growth year over year. In addition, we work closely with our FI quantitative research team as some of our trading may become more portfolio- attribute based.   

As FI traders, we must focus on improvement in the entire order-to-trade lifecycle. We work hard to bring liquidity to the front of the conversation. If the desk can provide pre-trade analytics and a menu of liquidity options for a given market context, then we are going to have a more effective order- generation process. Bringing liquidity to the front also benefits research analysts, allowing them to focus their efforts on ideas where risk or, in turn, the impact of exiting a position, can be sourced. The post-trade feedback loop is important, as well. 

How are you handling the current scarcity of liquidity in the fixed income space, and what changes are you seeing in terms of market structure and relationships in response to this?  

I would characterise liquidity as more challenging and different than the on-demand liquidity that the dealers provided prior to the global financial crisis. The way dealers manage risk and balance sheet is evolving, and I believe there is a structural change in the liquidity risk transfer mechanism in FI markets. Dealer management of their directional market risk and gross balance sheet has migrated to a liquidity ecosystem composed of ETFs, portfolio trading and macro portfolio products, CDS indices, and TRS, as examples. Across FI, price discovery can be challenging in the illiquid buckets. The growth in size of FI markets over the last decade has overwhelmed the traditional dealer inventory capacity. Therefore, the mindset must change for how today’s liquidity is viewed today, in my opinion. Today, there is a greater willingness for partnership across the buy-side, sell-side, and vendor communities to tackle the liquidity challenges we all face in FI markets. As a trading team, we keep our focus on approaches that will help us get faster, more streamlined, and incorporate more automated/digitised tools to match up with the human, soft skills of the trading team.  

What do you see as the most important trading technology trends within your space right now, and how are you handling these with regards to future-proofing the trading desk? 

In our assessment of new trends our first question is, which ones will help us deliver the best client outcome?  Desktop or workflow interoperability, from my perspective, is the most important initiative because it can be applied to the entire organisation and is applicable to our focus on streamlining the order-to-trade lifecycle. The simple explanation of interoperability is how your iPhone applications work within the operating system.  The next key trend we are emphasising for our FI trading platform is direct dealer connectivity to maximise the engagement with key relationships. Data literacy is the trader skillset of choice over coding, in my view, and we want to deploy scalable, consumer-grade applications to enhance this skillset on our trading desk.  The last trend I’ll reference that I believe may be structurally transformative is how we as a firm shape our methodology around the buy-versus-build construct. I believe a balanced approach works, building in partnership when we have unique intellectual property that enhances value for our clients and buying more commoditised applications that help us scale.  

How is electronification changing the fixed income trading space?

In FI markets, we have graduated from a decade-old, simplistic view of the equitisation of fixed income markets to electronification being much more than the point of execution.  I believe it is a process that allows FI desks to scale and meet the challenges of the vast amount of data pinging the platform. Through a protocol such as all-to-all trading, our traders can aggress against risk using a market context they have framed via the data flow we have on the platform. We are also trying to get smarter about how we use a traditional trading protocol like RFQ by using smart order-routing, data-driven tools to select the best dealers for a given RFQ. 

FI traders who visualise their value-add within the investment process as being a part of the idea- generation phase, bringing in market intelligence and who value their own time, have embraced the FI market structure advances that are evolving.  In that regard, FI desks that have adopted electronification, automation, and digitisation will have an advantage of attracting the next generation of trading talent that has only grown up with technology. 

What are the challenges regarding data in the fixed income space, and how would you like to see these overcome? 

FI markets by nature are fragmented, and that brings the need for innovative thinking in a firm’s approach to their tech stack and how data is handled. Data quality has improved in FI markets from a combination of Silicon Valley approaches, the automated market making capabilities of dealers, the influence of ETFs in the liquidity ecosystem, the advent of non-traditional liquidity providers, and the connective tissue approach of some vendor platforms. Data cost is a major challenge faced by the buy-side, so we have a high bar for data sourcing.  And the data we do source brings scale efficiencies to the platform. To mitigate the fragmentation and maximise our data aggregation efforts, we are pursuing projects with our OMS, EMS, and technology partners in the areas of aggregation and workflow interoperability. 

What are the differences between fixed income trading in Europe and the US?

I would not say there are any differences between the two in skill sets needed for success. Of course, there are regulatory and regional differences.  I’m less interested in the differences and more focused on the commonalities to improve consistency in process between regions.  

Price discovery and, in turn, liquidity, is more challenging in Europe at present but with the push for a consolidated tape, that should be beneficial for market transparency as TRACE has been in the States. Our London and Hong Kong traders have been instrumental this year as the FI market risk factors have had more macro influences. Their FI trading activity is multi-asset in nature and the associated benefit of that is an understanding of macro and micro influences on the transfer of risk.  That is the benefit of having a global perspective on our FI desk. Take emerging market credit liquidity, which is one of the more difficult markets for price discovery.  Insights from our EM credit trading team can be shared with traders in less liquid domestic FI like securitised credit or segments of high yield.