How has this year been for you so far?

We’ve had so many events in the market: from Covid to the Ukraine war to the mini-budget, central banks being hawkish, rate hikes – so there’s been a lot of volatility. This has resulted in increased volatility, so trading costs have gone up. In the past, small lines you could trade very easily, but you’re now having to work a lot harder – sometimes we’re only getting one or two prices back. So smaller size trades are taking a lot longer – trades where we’d usually just use automation and move on to high touch trades, we now have to spend more time on, which means we have less time to focus on high touch, because we’re having to spend more time on what should be low touch. We’re now thinking smarter about how we can adjust our parameters for automation for this environment to make sure we are still optimally using technology and benefiting from the efficiencies we’ve established. This may mean fewer quotes, a longer time limit, and so on.  

How is your team coping with the change? 

Our team are traders and portfolio managers, and it’s all hands on deck. We’re all learning things, all the time – this period has been intense, but a great learning opportunity. For years, nothing changed – now, every time we look at the news there’s something else we need to take into consideration. It’s an eye-opening time. Things are better now though – the worst time was through Covid,  when screen levels were not reflective of where risk was clearing. 

“The key is to use automation to our advantage to help us navigate volatile markets.”  

There’s a bright side though. We’ve been exploring different platforms, finding new sources of liquidity, and especially, learning how to use automation to our advantage. There are lots of exciting new elements now, such as using algos that work your trade slowly in the background. You just set parameters, and it works that trade for you, breaking it up throughout the day instead of executing in one big block. It can help you get better execution and better liquidity. 

The key is to use automation to our advantage to help us navigate volatile markets.  

What developments are making your job easier? 

Bonds are not like equities, there are so many and there won’t always be liquidity in every bond. There’s been a big rise in portfolio trading over recent months, especially sterling portfolio trading, which has seen volumes shoot up. It’s an additional tool in our toolkit,  and can save a lot of time, because instead of five traders trading 100 lines each, you can hand all that to one portfolio trade. We still do a lot of pre-trade work, obviously, but it can make things more efficient. In addition, it can result in reduced overall cost of execution when we trade as a package.   

How has the gilt crisis impacted your job? 

Thankfully we don’t hold any leveraged positions, but given the extreme market moves and volatility in the UK market we were diligent in maintaining liquidity and maintaining our risk tight to the benchmark.  

What has been your biggest challenge this year? 

There has been a huge increase in issuance, but at the same time, bank balance sheets have not been growing at the same pace, so we need to look at additional liquidity sources – and I think that buy-side participants can do more to fill that space.  

“Buy-side to buy-side simply hasn’t taken off yet in fixed income, and that needs to change.”

Buy-side to buy-side simply hasn’t taken off yet in fixed income, and that needs to change. There are no established protocols or platforms for this to to happen in scale. The industry still needs to evolve to be able to facilitate this, but it will be an important development for the fixed income markets if we are able to do so. 

All-to-all trading is taking off on platforms where a trade will go to all signed-up participants – and it is a great source of additional liquidity. But you’re not going to send a big trade there, because there’s a lot of price and information leakage. 

A consolidated tape would also be a step forward and is coming. This will entail having more access to prices that are traded, in a timely manner. The question is how long will this take and in what form?   

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Paras Shah

Agency broker BTIG has promoted Paras Shah to the role of head of EMEA credit trading, effective from November, The TRADE can reveal.

Shah joined BTIG in June 2022 as managing director, credit, as part of an expansion of BTIG’s fixed income credit team which also saw Christelle Girardie join in the same role.  

Shah was previously with Citi for just over three years as head of EMEA high yield trading, although left amid some alleged controversy.

Earlier in his career, he served for seven years at HSBC as a director in both high yield and sterling credit trading.

He most recently spent five months with Sun Global Investments as a fixed income institutional trader.  

His appointment follows a string of recent hires by BTIG over the past year. In March, Pavi Sidhu was appointed as managing director within BTIG’s equities division – joining from Exane, where he was head of portfolio trading, ETFs and index. 

Elsewhere, Andrew Vass, former head of sales trading for EMEA at Goldman Sachs, joined the agency broker as managing director as part of BTIG’s continued expansion of its institutional equities business. 

However, most recently, the broker lost its head of European sales trading, Ed Benson, who last week announced plans to retire at the end of the year.  

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A bull run 

ETFs are inundating the bond markets right now – to the tune of $32.5 billion in July alone, according to BlackRock’s monthly ETP survey. It was a significant uptick from June’s $3.2 billion, driven primarily by a surge of interest in corporate bond ETFs, which saw inflows of $13.8 billion in July, reversing the $9.9 billion outflows seen the previous month, with investment grade credit taking the lion’s share. 

“ETFs have become a significant market mover, and their influence on market prices has become much more noticeable over the last 12-18 months,” agreed Michael McGill, senior portfolio manager for emerging markets at Aviva Investors, speaking to The TRADE. “They’ve definitely become a much bigger player, especially in emerging markets hard currency.” 

“ETFs have become a significant market mover, and their influence on market prices has become much more noticeable over the last 12-18 months.”

European ETFs also saw a jump in July, attracting the highest monthly inflows in two years, with $2.2 billion in new blood flowing in. Much of this growth is down to changing market sentiment, as investors shift their focus to fixed income amid expectations of a significant growth slowdown and as rising interest rates pump up yields.  

“We prefer investment grade (IG) credit over equities on a tactical horizon as we see a new market regime with higher volatility taking shape,” said BlackRock in an August research note. “We believe IG credit can weather a significant growth slowdown whereas equities don’t look priced for this risk.”  

Yields are certainly on the rise, while prices are falling, meaning that opportunities abound. And investors are not just buying to hold – trading activity is also on the up, with 13 June seeing daily notional volume traded in bond ETFs hit an all-time high of $58 billion.  

But what impact is this ETF activity having on the underlying market? It depends who you talk to.  

The argument for 

“Proponents of an expanded utilisation of bond ETFs argue that fixed income ETFs not only provide an additive source of fixed income liquidity and exposure but also a novel means of price discovery for the underlying cash bonds,” explained Colby Jenkins, strategic advisor at advisory firm Aite Novarica. “As such, they are seen as a panacea for the inefficiencies of the fixed income markets.” 

“ETFs not only provide an additive source of liquidity and exposure but also a novel means of price discovery for the underlying cash bonds.”

Some take it even further, suggesting that bond ETFs are increasingly necessary shock absorbers to support wider market dislocations, and could help institutional fixed income traders navigate volatile market conditions, especially when the underlying cash bond markets run dry.  

But others believe that the influx into ETFs is sucking up secondary market liquidity for the underlying cash bonds – contributing to the problem, not the solution.  

The case against 

“We’ve had some really huge ETF flows over the past month, and that rise in passive flow is exacerbating some of the other problems in terms of liquidity,” noted a source who wished to remain anonymous. 

“The rise in passive flow is exacerbating some of the other problems in terms of liquidity.”

The issue is that ETF flows are, by and large, indiscriminate in the way that they execute. Whereas an active manager will usually have either a trader in-house, or use an outsourced service to access the market, passive portfolio managers tend to be more systematic, and use electronic platforms a lot more – even when the liquidity or the size of the trade doesn’t necessarily merit using a platform.  

What can then happen is that in times of very low liquidity, these platforms make automatic offer or bid requests in high multiples, and when they get filled in some orders but not in others, they just keep asking over and over, which can push the market in either direction.  

“They can also trade at a price that is not necessarily close to where the bonds are being quoted, which can then reprice the market to the wrong levels,” the anonymous source added.  

“It can create a lot of problems for the dealer community, who are taking what risks they can, because they end up short or long and then find themselves priced out of their position instantly, making a loss. In emerging markets especially, we’ve had some large ETF inflows that have been driving the market, and pushing it into dislocation, and that’s a frustration.” 

Another concern is that should the flows reverse, selling pressure within the secondary ETF space could spill over into the underlying cash bond market, placing undue selling pressure on an already highly illiquid market.  

But “that may not always be the case,” said Jenkins. “For the most highly traded FI ETFs, previous examples of significant market dislocation for the underlying bonds to date have provided evidence that liquidity in the secondary market for bond ETFs surge with little drawn down effect on the underlying market via the primary create/redeem mechanism.”

The opportunity up-side 

From a buy-side perspective, the biggest fear is the uncertainty – because no one really understands how long ETF flows will last.

“On the real money side, portfolio managers can usually get a sense of how investors are thinking and feeling toward the asset class, and whether there are inflows or outflows coming,” explained McGill. “But on the ETF side that is a lot trickier and can be different from day to day because no one knows how they’ll behave, or how long the flow will last.” 

 “You can try to figure out when the robots are buying and selling, and use them as a liquidity provider.”

For McGill, the solution to help manage portfolios more efficiently during volatile markets is to better understand ETFs themselves.  

“Take look at the technicals, the net asset values (NAV), the richness, the cheapness… and then you can try to figure out when the robots are buying and selling, and use them as a liquidity provider,” he recommended.   

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BlackRock came down hard on the side of credit this week, citing improved valuations, strong balance sheets, low supply and moderate refinancing risks.

“We prefer investment grade (IG) credit over equities on a tactical horizon as we see a new market regime with higher volatility taking shape,” said the firm in a research note. “We believe IG credit can weather a significant growth slowdown whereas equities don’t look priced for this risk.” 

Since June, markets have been captivated by the prospect of lower rates in the face of a growth slowdown, BlackRock analysts including global chief investment strategist Wei Li explained. “This has resulted in a drop in yields, boosting IG performance and triggering a 10%-plus equities rally. We still like IG credit at these levels.” 

“We believe IG credit can weather a significant growth slowdown whereas equities don’t look priced for this risk.”

The asset manager believes that credit yields now look more attractive than they did at the start of the year, due to a surge in government bond yields and a widening of spreads (the risk premium investors pay to hold investment grade corporate bonds over treasury paper).  

“We think higher coupon income provides a cushion against another yield spike as markets price in the persistent inflation we expect. Equity valuations, meanwhile, don’t reflect the chance of a significant slowdown yet, so earnings estimates are still optimistic, in our view,” said the analysts.  

Trends in the corporate bond market would appear to support this outlook. Supply is relatively low, with corporate bond issuance down almost 20% this year according to S&P data, and many issuers waiting to see what happens in the market before issuing further debt. Refinancing needs are also not too pressing, due to the surge in issuance over 2021 – with issuance levels of around $1 trillion comfortably exceeding expected annual upcoming maturities of under $600 million up to 2029.  

“We see IG credit weathering a slowdown better than stocks. We see activity stalling, underpinning our underweight to most developed market equities,” concluded BlackRock. “When would we turn positive on equities again? Our signpost is a dovish pivot by central banks when faced with a big growth slowdown, a definite sign they will live with inflation.”  

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American dollar and Russian ruble

At least six banks have started cautiously returning to the Russian bond market, reported Reuters today. JP Morgan, Bank of America, Citigroup, Deutsche Bank, Barclays and Jefferies are all reported to have started once again facilitating trades in Russian government and corporate bonds for their clients.  

A spokesperson for Deutsche Bank confirmed to The TRADE that the information on its Russian bond trading activities was “factually correct”. 

Most banks halted their Russian debt trading earlier this year following heavy sanctions imposed by the US, UK and Europe in response to the Russia-Ukraine conflict, as reported by The TRADE.  

A spokesperson for Deutsche Bank confirmed to The TRADE that the information on its Russian bond trading activities was “factually correct”. 

Following a ramping up of US sanctions against Russia, the Treasury prohibited market participants in the US from purchasing both new and existing debt and equity securities issued by a Russian Federation entity, causing most banks to cease their activities. JP Morgan, one of the last banks to exit, halted trading in June.  

On 22 July, new guidelines from the Treasury allowed holders to start winding down their positions again, within the parameters of current sanctions, allowing investors to exit their toxic positions. The US Treasury approved an auction in credit default swaps sold on Russian bonds late last month, with the Office of Foreign Assets Control (OFAC) issuing licenses for the auction and associated wind-down activities, following a group request by market participants.  

The Treasury also clarified that banks would be allowed to facilitate, clear and settle transactions of Russian securities in order to help their US clients wind down their positions. A Treasury spokesperson said the move was designed to help US and global investors make a clean exit from their Russian holdings.  

It would now appear that activity is being cautiously resumed, with most of the banks operating on a request-only, case-by-case basis.  

Citi, Bank of America and Jefferies declined to comment. JP Morgan and Barclays had not responded at the time of publication.

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ION Markets has created a new fixed income execution management system (EMS) for both buy and sell-side traders, The TRADE can reveal. Designed to ease challenges around selecting counterparties and sourcing liquidity, the new platform aims to digitise the entire dealer to customer (D2C) trading process. 

“In recent years we’ve seen an increase in need of integrated automated single solution tools to facilitate market making. We were seeing a lot of fragmentation of desktop applications and a lot of inefficiencies, so we thought, let’s do something that facilitates, automates, and makes the life of traders easier,” said Tommaso Di Grazia, head of fixed income product development at ION Markets, speaking to The TRADE.  

“Aside from Covid, and the challenges of moving to a hybrid working environment, what we’ve seen recently is a lot of changes in both market structure across different asset classes, and the way people are trading within it. For example, we’re seeing a trend of reducing trade sizes and increasing frequency due to the electronification of various asset classes. 

“We’re also seeing what we might call ‘equification’ – a trend of gradual alignment of fixed income towards what’s happened in the equities market. So we wanted to plug in an EMS that allowed traders to essentially slice and dice – collect orders, execute orders, reroute, request. It’s been available for a long time in the equity space but we increasingly saw the need for this within fixed income.” 

Trading desks are under increasing pressure to deliver best execution across different bond asset classes, but data can be hard to come by and the fixed income space is very different from equities when it comes to ease of information. The new platform aims to ensure best execution for the buy-side among various D2C markets and retail venues, as well as offering buy-side capabilities to sell-side traders through direct execution as well as at-trade and post-trade hedging. It also provides a full audit trail of all steps in the execution process, with automatically generated client reports.  

“Integrated within the ION market-making solution, the platform is modular, so you can plug things into it in a quick and sleek way. We think of it like Lego, you can add all the modules together easily and we take care of the integration so that clients don’t need to worry about it,” said Di Grazia. “It’s an entirely new product and that enables intelligent auto-execution capabilities for executing brokers while extending access to liquidity for sell-side traders.” 

In 2018 ION bought software specialist Fidessa in a £1.5 billion takeover, beating out Temenos to the punch. At the time, Fidessa had an award-winning fixed income trading platform, which some market players have suggested may have been a factor behind the acquisition. Given the currently sparse marketplace for fixed income EMS and OMS, the latest offering is likely to be received with interest.  

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Deutsche Börse

Deutsche Börse and Clearstream have co-developed a new data service, offering analytics and insights into the fixed income marketplace.  

Called Bond Liquidity Data, the new platform will pull aggregated data of settlement instructions for international securities from Clearstream’s ICSD. Investors will be able to evaluate fixed income asset and portfolios, measure liquidity and systemic risk of bond issuers and estimate execution prices for secondary trades.  

Alireza Dorfard, head of market data and services at Deutsche Börse, noted the fragmented and non-transparent nature of the European fixed income market, with relevant data stored with different market participants. “Our customers have, therefore, a strong demand for high-quality data on fixed-income instrument prices and volumes. With this new offering, we further support them in making an informed assessment and decision,” he said.  

Guido Wille, head of eurobonds business at Clearstream, added: “Clearstream processes close to 800,000 new issuances of international securities annually… Being at the beginning and the end of the fixed income value chain, we are uniquely positioned to provide comprehensive post-trade data, making the international bond market more transparent and thus more efficient.” 

The two organisations evidently recognise data as growth point for their businesses. In March this year, Deutsche Börse acquired data specialist Kneip with a view to forming a fund data hub based in Luxembourg – expanding its range of services, including data and post-trade services provided by Clearstream.  

Speaking at the time, Philippe Seyll, head of investment fund services at Deutsche Börse Group, said the move represented a chance to create “a leading European fund data champion” based in Luxembourg. 

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The annual survey polled close to 3,500 institutional investors globally and deciphered the results which ranked Citi top in rates and emerging markets, municipal bonds, overall quality, sales quality, trading quality, and e-trading market penetration. It was also ranked second in credit markets.

“Key to our success is the long-term and trusting relationships we have with all our clients, and our ability to align our efforts across the globe. As the fixed income market evolves, we will continue to adapt and work relentlessly to deliver the level of service our clients have come to expect,” said Jim O’Donnell, global head of investor sales and relationship management at Citi.

According to Citi’s fourth quarter results, revenues from its fixed income trading desk surged 49% to $2.9 billion – more than double the estimate predicted by analysts – due to strong performance in rates and spread products. 

Earlier this year, Greenwich Associates ranked Citi second for market share in the European fixed income market, behind JP Morgan for 2019. 

“The bank’s five-year reign as the share leader is now tied for the longest winning streak. Its success is well deserved given the unwavering commitment to delivering terrific client service,” said Frank Feenstra, head of markets division, Greenwich Associates.

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The chief operating officer (COO) for Citadel Securities’ global fixed income business has departed, after helping lead the development of its fixed income market making business.

Nicola White, Citadel Securities’ COO for fixed income, currencies and commodities (FICC), has left after serving more than three years in the role.

She has been replaced by Amit Bhuchar, who joined Citadel Securities in December last year from hedge fund AQR Capital Management where he was previously the COO of its fixed income business. Bhuchar was also the former global head of fixed income trading at JP Morgan Asset Management for over four years.

Bhuchar will now be responsible for the continued buildout of the Citadel Securities’ global FICC franchise.

White joined the US firm in 2016 after nearly 12 years at Morgan Stanley, where she was the global head of the bank’s rates and fixed income electronic trading team. White’s Linkedin profile states she is now in “non-compete”. 

During White’s time at the US firm, she has helped to significantly expand its electronic market making capabilities for US Treasuries and other fixed income markets. In 2017, it joined Tradeweb’s electronic platform for trading US Treasuries as a liquidity provider, gaining access to more than 1,000 institutional traders.

Citadel Securities has set its sights on competing with the large investment banks that have, in the past, dominated market making for fixed income and credit markets. Citadel Securities began ramping up its fixed income business following the appointment of Paul Hamill as head of FICC in 2014 from UBS.

The business now provides liquidity and market making services across interest rate swaps, US Treasuries and credit indices for over 1,200 clients.

In addition to the hiring of Bhuchar in December, Citadel Securities also recruited Kelly Wang head of APAC FICC sales and relationship management in October, and Lucy Liu as head of transaction sales for Europe and Asia in September.

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Buy-side cover interview – Matt McLoughlin, head of trading at Liontrust Asset Management, talks about the firm’s move to multi-asset trading, the importance of ‘softer’ trading skills and how change creates opportunities for those ready to take advantage.

The big interview – Rob Mackay, who took on the role of CEO at Itiviti in April, talks to The TRADE about last year’s merger with Ullink, the firm’s ongoing work with Bloomberg, and why the enterprise vendor space is failing on legacy technology.

Buy-side interview – Stefanie Holtze-Jen, chief currency strategist at DWS Group, talks to Nikki Tavendale about the need for greater diversity in the FX markets and how this will help further the revolution in data analytics.

Timeline: Deutsche Bank’s prime brokerage & electronic equities – The TRADE highlights some of the key inflection points for Deutsche Bank’s prime brokerage and electronic equities businesses that have been casualties of the German institution’s severe cost-cutting measures.

How to deal with a billion-dollar credit portfolio trade – Following the launch of the first portfolio trading protocol in credit from Tradeweb earlier this year, Hayley McDowell breaks down how these complex transactions are executed and examines the rise of portfolio trading in credit markets.

BNP Paribas gives FX algos a voice with launch of ‘ALiX’ digital trading assistant – BNP Paribas takes a leaf out of Silicon Valley’s book with a Siri-style digital trading assistant, which is launching alongside real-time market analytics and interactive algorithms as part of major upgrade to the bank’s Cortex FX trading platform, writes Hayley McDowell.

The Trade’s (Unofficial) M&A Awards 2019 – The TRADE reviews the mergers and takeovers that have caused a stir in the industry. The Unofficial M&A Awards return for a second year, as consolidation in the exchange space raises more than a few eyebrows and investment in FinTech has never been hotter.

The 2019 Execution Management Systems Survey – The 2019 edition of The TRADE’s Execution Management Systems survey finds the space in rude health as execution quality continues to increase.

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