Enrico Bruni, Managing Director and Head of Europe and Asia Business at Tradeweb spoke to Dan Barnes about market evolution over the last 18 months.
How did you maintain momentum during the extreme volatility last year?
During the pandemic, market participants found themselves operating in a challenging environment with bouts of volatility, while having to adapt to remote working. As a venue, we were in a position to offer traders flexible execution tools and mechanisms, helping them adjust to their new work-from-home setup. The adoption of electronic trading was a beneficiary of that changed environment, and protocols put in place pre-Covid that are well-suited to volatile market conditions, like portfolio trading, have been picking up. Also providing clients with the ability to trade multiple asset classes seamlessly in one place has been advantageous. Whilst some of our markets in the micro space, like credit, were more challenged amid the high volatility in early 2020, macro markets, like ETFs or interest rate swaps, were more fluid.
At any point were clients asking you to change direction?
Typically, they wanted us to extend our strategy of collaborative innovation; perfecting some of the newer protocols, like portfolio trading, or more established protocols, like AiEX, according to their needs. A constant ask was helping clients to better use and capture data across the trading lifecycle from beginning to end, and then use that information to improve execution. The most obvious example was seen in AiEX, our rules-based automated trading solution. It evolved as new use cases began to emerge, particularly in the ability to use data more effectively and embed information when tweaking parameters for execution. In the last 12 months, more growth in AiEX happened either in asset classes where liquidity can be harder to access, such as credit, or in asset classes where automation is very established, for example ETFs. It also resonated with a new set of clients, like the hedge fund community, which uses data a lot to inform execution, notably quant hedge funds.
What has driven the success of portfolio trading amongst buy-side traders?
There are several reasons why portfolio trading has taken the credit world by storm, and certainty of execution is one of them. In times of intense volatility when liquidity is stretched, like in March 2020, the ability to turnover positions quickly becomes a priority. Secondly, it reduces further liquidity stress, as it allows asset managers to include bonds with different liquidity profiles in the same package and trade them in a single transaction, balancing these elements in a much more effective way. Then finally, it is about operational efficiency. Engaging in portfolio trading fits easily into the existing workflow. All these portfolios are really sizable in terms of both the number of line items and the actual size that is transacted. An added bonus is the time-stamped audit trail, helping traders prove best execution and adhere to compliance policies.
In terms of automation, AiEX has taken off, what is driving that automation story?
So, it’s a similar story to portfolio trading. They’re both easy for clients to add to their workflows, as we’re already integrated with their order management systems. And I mentioned earlier that some of the use cases have evolved, particularly among hedge funds trading interest rate swaps. With AiEX they can react quickly to market signals and realise strategic trading opportunities.
Users now also have access to our Direct Dealer Content service, which provides streaming prices and axe data from dealers in a single API feed. It means they can embed analytics into the dealer selection and execution process, and leave the machine to complete the trade. Also, if an order does not get filled based on the existing parameters, traders can replace non-responding dealers ‘in flight’ or automatically re-submit the enquiry.
We have also allowed clients to interact with the orders in real-time, so that they can adjust their rules at their own discretion, including trading protocol or dealer selection criteria. We do not have a one-size-fits-all approach to ensure we can meet all the different client requirements that can exist, as well as the different workflows and challenges across asset classes.
How is the LIBOR transition affecting your business?
In multiple ways. Firstly, it has taken time to see meaningful progress – at least three years in the UK, where we have been working closely with the Financial Conduct Authority (FCA). A lot has been happening to liquidity in the sterling swaps space. Today we have 21 market makers providing liquidity into SONIA. We are always trying to adapt tools to address new situations and client needs. For many years, we have had a compression tool to help firms reduce the number of trades sitting on their books at the clearing house. We have tweaked that tool, so it can be used to switch from legacy LIBOR positions into SONIA or other risk-free benchmarks. Last year the number of portfolios combining SONIA with GBP LIBOR swaps that were actively transitioned on our platform was north of 400. In Q1 2021, we saw for the first time the majority of the sterling volume being in SONIA rather than LIBOR.
Europe and the U.S. are slightly different in terms of their transition journey, but we have very robust ESTER and SOFR offerings with 25 and 19 dealers, respectively. So with the LIBOR deadline fast approaching, there has been lots of involvement and engagement both with regulators and industry groups, working together to help clients with their transition efforts. The message from regulators is to act now and we agree with that, so that firms are not caught out and they give themselves enough time to set up their systems ahead of January 2022.
Where are you seeing growth in China and how are client appetites changing?
As you know, we were the first venue to offer access to the Bond Connect programme in 2017. Since then we have added, in co-operation with Chinese onshore participants, a series of features that are very common in developed markets: pre- and post-trade allocations, dealer streams, list trading, T+N for some of our Japanese clients and AiEX.
We were very mindful that Bond Connect was not the only channel allowing global investors to access the world’s second largest bond market, so we worked again with CFETS (China Foreign Exchange Trade System) to add electronic RFQ to CIBM Direct. This is another popular channel, but unlike Bond Connect, it was set up to operate with more manual workflows. There was demand from clients to use both channels but to see the same execution experience, so we facilitated that in August 2020.
There is certainly a close correlation between the development of these access channels and foreign investor inflows into the Chinese onshore bond market, because real-money clients are using us. We work through onboarding and connectivity – catering to all different types of customers and needs -and we have seen many of our international clients coming on board.
In 2021 what are the key trends, and which will endure over the next 12-18 months?
Increased adoption of electronic trading is top of my list, alongside more auto-execution. Even in assets which have been electronic for a while, there is still significant scope for greater digitisation, depending on the client and the product type.
One other trend that I think will shape the next few months is the ability to connect various markets together. We have had several cross-asset initiatives in recent years particularly in the swaps and futures space, for instance our multi-asset package functionality, in single or multiple currencies. We are looking at how to unify those workflows more and more. Some of these markets are connected by definition; we have engaged in ETFs for some time and fixed income ETFs are a very important part of our business. Now we are using this capability to provide liquidity into credit markets.
Our multi-asset offering is a real advantage for clients working with us, as we see what is happening in one part of the market and then use it to help inform what is happening in other parts. Portfolio trading showcases the success of this approach, and is also a manifestation of the crossover between ETFs and fixed income that has expanded beyond its origin.
The ongoing electronification of emerging markets swaps, even for those without a clearing mandate, is also a very positive trend and all the more impressive because there is no regulatory impetus. And, of course, I have to mention the optimisation of data and analytics, with a focus on ESG investments. As green bond trading volumes continue to grow on our platform, we’ve been developing new tools to help clients identify green bonds and satisfy their need for more transparency and visibility into this space.
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