The use of axes, whereby a trader’s interest in buying or selling a given security is shown, has seen continued growth over the last few years, with the data provided by them being used in various investment strategies.
Axes have typically been used by traders looking to execute larger or block trades which they are not comfortable executing electronically. In this instance, axes are able to provide traders with an indication of which sell-side counterparty they should select.
The use of axes has also seen continued use in the fixed income space, with their use cases expected to continue to increase in the future.
“The ability to find a matching opposing side remains crucial in the many, less liquid areas within fixed income,” Lars Salmon, head of fixed income trading EMEA at Fidelity International, told The TRADE.
“Whether it is direct provision of axes by dealers, through specialised vendors or those who play a broader role in markets, or axe indications on trading platforms – in a world where markets are fragmented, dealer balance sheets light, settlement discipline likely to find further focus from regulators – and all of that resulting in challenged liquidity – the likelihood of strong execution results generally improves where inventory can be utilised.”
Elsewhere, in the credit markets, axes are particularly useful given that traders are typically executing larger orders where minimising market impact and information leakage is essential.
Over the years, buy-side use of axes has evolved significantly, with portfolio managers increasingly using them as well. Portfolio managers typically use axes to be more opportunistic and to ensure that when looking to send an order to the execution desk, it is something that has a realistic chance of being executed in the first place.
“There’s not much point trying to sell a bond if there are no bids out there and vice versa,” Byron Cooper-Fogarty, chief operating officer at Neptune Networks, told The TRADE.
“The axes also allow portfolio managers and the trading side to interact in a way that that finds the optimal bond to express their investment views.”
The most important aspect of axes is the information they provide around a counterparty, Cooper-Fogarty highlights, emphasising that the direction is key. “It’s really the counterparty, the direction, the size, but also an indication of value – be that spread or price as well – which are the most important things axes can provide,” he added.
“Historic axe data has started to become more important as well. Increasingly, what we’ve found is our buy-side clients are measuring their counterparties from the sell-side in terms of slippage or price improvement. Based on the historic axes, they can get a picture of reliability around axe data as well for each counterparty.”
The use of axes has seen continued growth in both the US and in Europe, as they become a larger part of the trading and investment process. Axes are no longer only being used on the trading desk, but also research and by portfolio managers.
“In terms of provision of axe data, accuracy (of size and level) is having a number of advantages in terms of pre-trade considerations, though less specific indications can also work, arguably helping to protect the liquidity providers that remain pivotal in the fixed income market structure,” noted Salmon.
“While a number of ideas with regards to the evolution of fixed income markets are based on bringing as many interests/axes together as possible, it is questionable whether the market structure can change drastically enough in the foreseeable future to significantly reduce the very material reliance on the current crop of market makers – mostly banks and some non-bank liquidity providers – and the way the majority of business is still being conducted.”