The ability to aggregate external and internal liquidity can deliver streamed pricing in all markets.
JP Morgan is on the path to providing a combined market making operation, supporting clients even in highly volatile markets by providing a flow of liquidity based on all internal and externally available sources.
Scott Wacker, head of FICC E-commerce Sales at JP Morgan, explains how buy-side firms will be able to enhance their fixed income trading through leveraging this investment.
The DESK: How has engagement with clients changed this year?
Scott Wacker: Our investment in technology and infrastructure, really paid off when we consider this year’s market dynamics. that we’ve seen this year.
With interest rate moves, inflation, quantitative tightening (QT), the attack on the Ukraine and energy prices rising, all this has led to tremendous volatility across a number of asset classes.
The result has been reduction in risk and a change in duration profiles. In credit trading we’ve seen an increase in portfolio trading (PT) as a tool to expedite execution, with broader use of PT, surging in the last year or so. Over the last few weeks as the need to move risk grew portfolio trading correspondingly increased. That in itself has created an evolution in the market.
There has been a large increase in request for quotes (RFQs), the number of tickets have exploded, but the notional on the trades has tended to shrink mainly because electronic execution is starting to process more transactions and as things electronify, trades get smaller as they go through the machine.
The other thing we’ve been building are actionable streams, adding a new protocol streaming data versus simply RFQs. Clients are engaging with streams and have relied on them for both execution and pre-trade work.
TD: How does that reflect market-wide trends?
SW: The liquidity landscape is changing. Liquidity distribution is flattening out. So rather than most of the trades coming in around a given notional – which differs across markets and geographies, for example $2.5to $5 million notional trade on the electronic side – we’ve seen that flatten out. In electronic trading for example, we’re seeing a growing number of smaller trades, while on the portfolio trading side, we’re seeing a lot of really big trades.
Another trend, as a result of more portfolio trading going on, is that it has broadened the definition of what’s liquid. If you think about how portfolio trade is constructed, there’ll be 80% bonds considered liquid, and 20% that are less liquid. As more volume is going through in the PT format, then sell side firms we have to start valuing those illiquid bonds more frequently, so that’s increased, liquidity in some historically less liquid stuff. That’s a good evolution for the market.
TD: How are you resourcing trading differently?
SW: We’ve been developing an internal liquidity pool for bond trading. . It is essentially an internal systematic aggregator of external liquidity within JPMorgan. It results in more streams and enables us to aggregate all possible flows, internalise a whole lot more and as a result we’re able to commit to pricing. It’s effectively an internal market making system that really starts to pull in the disparate liquidity constructs. As we develop electronic pricing, it really helps our streamed pricing as well.
The other area we’ve added resourcing is via internal liquidity. If we consider JP Morgan’s franchise to be everything we harness such as direct client requests, portfolio trading, etc. then external liquidity has traditionally been in the exchange-traded fund (ETF) side of the business which in the past has always been an equity product set. As clients, banks and non-bank market makers have all figured out that there’s a huge pool of external liquidity, we spent a lot of money investing in the ETF create/redeem process trading baskets. That has led new liquidity to come into the market.
TD: Is the central risk book a key part of your offering?
SW: Most large banks have a central liquidity pool for FX trading, and that evolves every day of every year. In credit which is very different, pulling together ETFs, portfolio trading, platform trades and direct connections, allows you to start streaming prices out and respond to RFQs. We’re still in the early stages of developing these deep liquidity pools but watch this space.
TD: How are clients responding to this evolution?
SW: This may be a crisis response versus a normal market response, but flows have become increasingly bimodal. We’ve got a lot of smaller RFQs which suggest people are running their own algos but then block trades, particularly in PT format, have also grown. That reflects the flattening I referred to earlier.
We’ve seen more interest via EMS users to develop execution efficiency and improve automation, but crucially traders need to be able to make sure the efficiency gains they realise can scale.
TD: Are client priorities changing?
SW: Pulling together data to make decisions; having an organised way to separate trades which demand more time versus trades you need to spend less time on; automation; then transaction cost analytics (TCA) with pre and post trade analytics are important. A common theme is also execution costs and information leakage. If an EMS enables you to trade with dealers directly on business that you want and you can control that and you’re not letting the market know what you’re up to. Your data and transaction data doesn’t get re-entered and redistributed to the market. It doesn’t find itself in composite prices and therefore tell the market what you’re doing. The benefits are so many, and this is something we’ve seen a lot more clients asking about but because it’s not as developed as it is in other asset classes, we still have a long way to go.
TD: How has trading performance been affected this year?
SW: There’s always some inertia and we’ve pushed through the that. We’re deploying the OCB, pulling together various streams, internalising flows, and leveraging the expertise of our credit traders, but we’re combining that with electronification.
That allows us to be more consistent in how we respond to client interest. We’ve seen an increase in volume and activity on all different formats, but the ability to internalise this franchise component is so important and when we can actually combine our franchise flow with the external liquidity that’s currently available, and do so in an efficient format and clients can engage with that directly it’s going to be amazing. Our whole objective here is to provide better execution to our clients, better liquidity better transparency, and we want to be there through thick and thin. They’re not our counterparties, they are our clients.
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