Robert Fink, head of buy-side relationships at analyst firm Coalition Greenwich, opened a session at the Fixed Income Leaders Summit in Boston, by noting that all-to-all trading – as anonymous request for quote (RFQ) execution –made up 17% of total e-trading in US credit and perhaps surprisingly, this figure has been static for five years.
One reason for this ceiling could be the challenge faced in responding to anonymous RFQs in a timely manner, noted one trader. “The behavioural side of it is a key component,” said Michael Daley, senior fixed income trader at T Rowe Price. “Liquidity has become more fragmented across different platforms. By looking across MarketAxess and other platforms, across IB, trading on the phone [traders are] probably missing liquidity at times as it’s presenting itself. Having rules-based, auto responding, which we’re seeing more, with a set of parameters so that an RFQ auto-executes when facing those parameters, supports the idea of the buy side serving as a liquidity provider and pricing risk.”
Jonathan Birnbaum, CEO and founder of OpenYield, said, “That concept is a symptom of what is holding back all to-all, in that you don’t want to live in a venue, you want to have technology that aggregates, consolidates and routes to the venues, and I think this technology is somewhat missing. We have a list of three dozen vendors that are in the business of connecting to venues and routing, and execution management systems have this in the futures and equities markets.”
Abhishek Sinha, CEO & CIO, Nelumbium Capital, observed that the potential for change was increasing as all-to-all trade sizes grew, and firms began to tackle illiquid periods in the market via warehousing of bonds. “In 2013, 8% of IG bonds were getting traded electronically, now it’s nearing 50, so electronic trading is happening and all-to-all is also growing with the pie,” he said. “We need liquidity at the time nobody is providing liquidity. Looking at [the liquidity crisis in] March 2020, the Federal Reserve attributed a quarter of price dislocation, to illiquidity. So I would say as the capital cost normalises for non-bank liquidity, we will see a much bigger move towards liquidity warehousing at a time of crisis.”
Asked if there could be a ‘real’ or ‘imagined’ threat from all-to-all trading which might be limiting its expansion, Birnbaum said, “I think you need to have a very firm theory for why more competition is a bad thing when you’re trying to sell an asset. You’re competing with more people, you’re drawing at the highest marginal bidder or the lowest margin offer. It’s generally going to be a good thing. The only theory for why it might be a bad thing is that there’s some sort of information leakage about all-to-all trades that results in worse outcomes.”
Daley added that trading technologies were enabling buy-side desks to overcome fragmentation by building aggregation of watch lists of securities to trade and putting those back into the market. “At T Rowe Price we have an execution management system (EMS),” he said. “It’s a great aggregation tool at putting liquidity in front of you. You can see stacks and importantly the pre trade data from all of those different platforms, brought into one centralised area. That will help inform traders’ protocol decisions, but also rather than having to create watch lists in each venue, the EMS creates one centralised watch list for me, where I can have rules-based parameters in place as liquidity is presenting itself. I’m agnostic to where an RFQ comes from, I can just respond to it. Reimagining workflow and aggregation is a huge step.”
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