Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
With Covid-19 causing turmoil for the global economy and
logistical workplace disruption, numerous sectors within the
capital markets have been forced to shift their mindset towards
electronic trading. That said, with nearly $10 trillion dispersed
across the corporate bond market, volatility and index turnover
during this period have forced many on the buy-side to explore new
trading protocols as standard list trading has become more
challenging due to the lack of liquidity depth and the accompanying
price dislocation.
Portfolio trading, on the other hand, offers a discreet and
highly efficient way to trade a basket of bonds with varying
liquidity profiles in a single transaction. With the rapid
electronification of the global bond market and a surge in fixed
income exchange-traded funds (ETFs), portfolio trading is tipped to
become one of the most efficient ways to deal with large, complex
and multi-faceted bond transactions. With swelling interest
observed over a very recent period, we dedicated a session to the
topic at our
inaugural Index Conference in Q4 of 2019 and found that 17% of
our attendee firms had already executed portfolio trades in 2019
and over 25% who had not were planning to do so in 2020.
Source: IHS Markit - 2019 Index Conference, 14 Nov
2019
Flip the calendar to 2020, and the data point understated the
trend. In Q2 of 2020, WBR Insights and Jane Street surveyed 100
buyside Heads of Fixed Income trading and the numbers already
looked quite different, with more than 80% of the firms polled
planning to leverage the protocol within the year. To further
underscore the substantial ascent, some of the largest fixed income
asset managers are now forecasting that 10-25% of their enterprise
credit trading volume will be executed through portfolio trades by
mid-2021.
Source: WBR & Jane
Street; Fixed Income Trading in 2020: How COVID-19 Has Changed the
Game
Both sides of the Atlantic have observed a momentous uptick in
portfolio trading this year. The current climate has both
accelerated the growth and acceptance of the protocol across the
buy-side community and has ultimately led to a step change in
associated resource and technology spend at investment banks as
well. Highlighting these themes, JP Morgan's credit trading desk
reported
volumes had already more than doubled from 2018 levels and
TradeWeb
surpassed $100 billion in cumulative trading volume just 18
months after it launched the protocol.
What's the attraction?
There are several dimensions and market structure benefits to
consider. Portfolio trading provides both customization flexibility
and efficiency gains, in that it serves as the mechanism to execute
a diversified basket of bonds with a single counterparty. Given the
complexity of their mandate and demands on their time, multi-asset
execution professionals require tools and insights that will serve
to optimize efficiency in their multi-step workflows. With
portfolio trades, these professionals can deal baskets with
hundreds of line items consisting of different durations, credit
quality, liquidity dynamics and trade directions in a single
aggregate transaction. If that trader then decides to proceed with
an electronic protocol, every line item can be fed back into the
client's order management system with the associated time stamp and
comprehensive audit trail.
Another key driver of popularity is that portfolio trading can
also mitigate market impact risk and transaction costs because it
allows desks to consolidate liquid and illiquid securities within
the same basket. Finding another dealer to execute on specific
illiquid bonds is difficult even during the best of times.
Portfolio trading provides the ability to bundle these bonds as
part of a broader diversified basket. Thus, the impact of moving
illiquid bonds or volatile issuer names in general can be vastly
diminished.
Finally, engaging via this protocol guarantees execution of the
entire list through all-or-none execution. In an interview earlier
this year, a large asset manager mentioned that of the more than
130 trades that were initially modeled and projected as portfolio
trades, less than 2% of the orders were ultimately pulled back and
routed in pieces to different execution protocols. Clearly,
"getting done" is the priority and portfolio trading provides that
opportunity on a best execution basis.
Are you prepared to participate and what will it
take?
If buy-side firms are to take advantage of these new protocols,
it is critical that they have access to tools that facilitate the
portfolio construction and basket creation processes. In order to
minimize inherent operational and market risk and to maximize
efficiencies, participants will be seeking solutions to replace the
distribution of spreadsheets via emails and manual workarounds. Per
the WBR and Jane Street survey, increasing workflow efficiencies
and straight-through processing (STP) was the advancement that most
felt was required to unlock further activity. "Third parties will
need to ensure that their products are capable of STP and to focus
on further improving the trader's workflow to help speed up their
trades," said Irene Cerquaglia, Conference Director, Fixed Income
Leaders Summit EU.
Source:
WBR & Jane Street; Fixed Income Trading in 2020: How COVID-19
Has Changed the Game
IHS Markit's portfolio management system, thinkFolio, provides
portfolio managers with the ability to construct their portfolio
trading baskets with ease when monitoring inflows and outflows of
cash, rebalancing funds or opportunistically managing exposures.
Asset managers using thinkFolio can leverage portfolio modelling
and basket trading features to facilitate pre-trade analysis and,
ultimately, cost of transaction execution. The platform also gives
portfolio managers and traders the ability to monitor portfolio
trades throughout several stages of the lifecycle, resulting in
significant time savings, transparency and reduced operational
risk.
As this activity has garnered more attention across the
sell-side and buy-side communities, more electronic trading venues
have developed portfolio trading protocols and continued to invest
in the space. thinkFolio's most recent release of software in June
2020 provides users with the ability to quickly construct and
release portfolio trades with those trading partners. Through
proprietary automated workflow rules in thinkFolio, portfolio
trades can be routed to the electronic platform of choice
seamlessly - something that is even more crucial during volatile
markets when traders need to distribute risk.
In addition to thinkFolio's workflow and STP value propositions,
IHS Markit's bond pricing and liquidity data supports portfolio
trading activities by providing timely and accurate data for
instruments across corporate and sovereign, securitized and
municipal bond products. As part of their pre-trade evaluation,
asset managers can leverage streaming data to improve inputs into
pricing algorithms and facilitate a dynamic, highly transparent
trading environment.
As global corporate bond market structure continues to evolve,
participants will both seek and rely on technology solutions that
automate their workflows and provide them with a robust and
diversified suite of venue connectivity and trading protocols. By
delivering the ability to efficiently model and execute portfolio
trades within thinkFolio, asset managers will realize significant
benefits in terms of time savings, market risk mitigation,
operational risk reduction and transaction cost optimization.
Posted 08 October 2020 by Brett Schechterman, Managing Director, Global Head of Business for thinkFolio, S&P Global Market Intelligence and
Nikhi Gill, Executive Director and Product Manager for thinkFolio at IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.