With the transition from Libor to SOFR at the end of 2021, derivatives traders have had a bumpy ride switching to the new risk-free rate. The first SOFR swaptions traded earlier this year, with a couple of block trades executed by Goldman Sachs and JP Morgan in February 2022, but concerns have been raised around the lack of a robust volatility market, with limited liquidity and not many dealers yet quoting the instruments.

Tradeweb is seeking to change that, and last week completed the first ever fully electronic SOFR swaption with Goldman Sachs and Caisse de dépôt et de placement du Québec (CDPQ) as counterparties on its Tradeweb Swap Execution Facility (TW SEF). Since the completion of the trade, 15 dealers are now providing swaptions pricing on the platform.  

Tradeweb has been offering SOFR swaptions trading on its platform since the Libor transition at the end of 2021, and the latest development gives market participants a more efficient way to access market rates liquidity – using its request-for-quote (RFQ) tool to put multiple liquidity providers in competition, and request-for-market (RFM) functionality to access two-way markets. 

Colm Murtagh, head of US institutional rates at Tradeweb, said: “Facilitating SOFR swaptions trading is yet another meaningful step forward in the electronification of markets, demonstrating how non-linear swaps can also benefit from electronic execution and access to deeper pools of liquidity.” 

A swaption (also known as a swap option) trade allows participants the ability to opt into an interest rate swap contract. Swaptions provide traders with optionality and control as they transact and hedge in the OTC market, and players like Pimco and Pershing Square have raked in hundreds of millions of dollars using them as a position against higher rates. With the expectation of further rate hikes, equity and fixed income managers who would not normally participate have also been piling into the market as a hedge, driving volumes upwards but making liquidity scarce. 

According to some reports, the US swaptions market doubled in the last quarter of 2021 alone, and the growth has continued this year – Tradeweb reported a 42.3% year-on-year jump in average daily volumes for May, up to $214.9 billion. Given that in the first quarter of the year Tradeweb accounted for 52% of all platform swaps and 71% of dealer-to-client swaps, that suggests a sizeable market-wide jump. 

The electronification of trading is an ongoing trend in the swaps market, with a 2021 study from Coalition Greenwich finding that European swaps traders on the buy-side already executed 45% of their trades electronically, and growth expected to continue in the coming year.  

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Now in its 15th year, The TRADE’s 2022 Algorithmic Trading Survey will be live for buy-side participation until 21 February, with ‘Long-only’ and ‘Hedge fund’ results due to be included in the Spring and Summer issues of The TRADE magazine, respectively. We encourage algorithmic trading providers to support client participation.

Last year the Survey received a record number of 1,468 ratings, across over 30 providers of algorithmic trading, yielding thousands of data points for analysis. The results highlighted that the percentage of funds trading via algorithms continues to rise, with traders opting for tried and tested strategies like volume-weighted average price (VWAP) during market uncertainty, as well as price improvement strategies, such as dark or alternative liquidity seeking algos. Whilst overall scores were high, both long-only and hedge fund managers called for improvements in key areas such as price improvement, execution consulting and customisation.

The Algorithmic Trading Survey is aimed at buy-side traders across all asset classes and regions. This year the Survey includes additional questions, to monitor the continued increase in the electronification of non-equity markets.

To participate in the survey, please click here.

The 2021 Algorithmic Trading Survey results for long-only and hedge fund clients can be viewed here.

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Known as Aiden, the platform uses deep reinforcement learning processes to adapt to changing market environments and execute trading decisions based on live market data.

Aiden uses pre-programmed data inputs and can make more than 32 million calculations per order without the need for re-coding like traditional algorithms.

Shary Mudassir, co-head of global equities execution at RBC Capital Markets, stated that the market volatility seen during ongoing coronavirus pandemic has provided the firm with an opportunity to prove its ability.

“Aiden was able to recognise the sudden changes in the market and adapt to them, allowing it to preserve performance,” Mudassir added. “The Aiden platform is part of our vision to be one of the best in the world at unlocking the potential of artificial intelligence and delivering those insights to our clients in an explainable way.”

RBC Capital Markets said its traders worked alongside AI scientists at its Borealis AI research centre to create the initial concept and develop the platform. A volume-weighted average price (VWAP) algorithm was the first Aiden solution to go live, allowing reduced slippage to improve the broker-dealer’s clients trading performance.

“The Aiden VWAP algorithm has demonstrated, under a standardised evaluation framework used to eliminate bias, the ability to significantly reduce slippage against market VWAP in the US equity market,” said Jas Sandhu, head of equities algorithmic trading at RBC Capital Markets. “There are plans to expand the Aiden application to RBC Capital Markets’ full suite of electronic trading algorithms.”

Aiden is available to RBC Capital Markets clients that are trading US and Canadian equities, with plans to roll out the platform to other clients across its geographical footprint in the coming months.

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In a statement, Cboe said it had received regulatory approval to temporarily operate its options exchange through electronic channels until 15 May this year, or until the trading floor becomes operable. The changes could be extended depending on how the situation progresses.

Three modifications will support the transition from electronic and floor trading to all-electronic execution, which aim to replicate trading that takes place on the physical trading floor.

Under the new temporary rules, market makers can be solicited for submitted orders into Cboe’s price auction to replicate liquidity on the trading floor, and will not be subject to continuous quoting while participating in the new environment. Cboe has also gained the ability to push more complex strategies with multiple options in electronic trading.

“The SEC’s work with Cboe in this matter is reflective of the agency’s continued commitment to help market participants respond to operational and other challenges raised by COVID-19, including in connection with the implementation of business continuity measures,” said Brett Redfearn, director of the SEC’s division of trading and markets.

“More generally, the division is monitoring operational shifts necessitated by the implementation of business continuity plans and stands ready to advise and assist exchanges, clearing agencies and other market participants with operational and other matters.”

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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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A poll of almost one-third of all asset managers and half of hedge funds based in the US, carried out by Greenwich Associates, found that based on current trends 70% of those investors will execute some portion of those trades electronically.

Institutional investors surveyed executed 14% of their emerging market fixed income trading notional volume through electronic platforms between 2017 and 2018. Greenwich said that as electronic trading has increased access to data and markets in the developed world, the same is now being seen in emerging markets.

“Technology is increasing the flow of information, removing the language hurdle and connecting disparate brokers and investors from all over the world, allowing trades to consummate that only a few years ago would have been too expensive, if not impossible, to get done,” said Kevin McPartland, head of research for Greenwich Associates market structure and technology, and author of the report.

The report from Greenwich also showed emerging market investors have broadened their access to liquidity providers in recent years, and directing less of their trading to their top dealers.  The top five emerging market dealers handled 65% of emerging fixed income in 2014, but today, the top five dealers handle 54% after losing share to regional dealers globally.

Greenwich concluded that emerging markets are as diverse as the cultures of the countries and firms that issue the debt, and those nuances must be recognised by electronic platform providers and their users to ensure progress.

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A report from Greenwich Associates exploring the evolution of equities sell-side execution technology found that brokers expect 48% of their clients to ask for more customised order-handling logic over the course of the next year.

With almost half of buy-side clients looking for customised algo solutions compared to just 27% last year, Greenwich Associates said the increase reflects how fast equity execution technology is evolving and how hard brokers must work to keep pace.

“Today, armed with new insight and analysis, buy-side traders have a much clearer view about the types and timing of strategies they want to use, the order types that work best and the venues they want to access,” said Richard Johnson, vice president of Greenwich Associates market structure and technology and author of the report. “All of this places an increasing demand on the broker to accommodate their clients’ order-handling requirements.”

Historically, most bulge-bracket and agency electronic brokers have white-labelled their algorithmic services to other brokers, but relying on another broker for algo execution could limit the ability to provide customised order-handling logic to the buy-side.

In response to this, Greenwich Associates found that brokers are increasingly focused on offering customised algos, with 94% of electronic trading executives agreeing that customisation is an important part of their service model.

The report also estimates that around 73% of global equity flow is now executed electronically. Despite buy-side traders still routing a large proportion of their order flow via high-touch channels, many of these high touch orders are usually executed by sales traders using their algo desk’s services.

“Greenwich Associates estimates that 73% of global equity flows are executed electronically,” Johnson added. “This data point includes some less-developed global markets and for more liquid, developed markets the rate is likely over 90%.”

The report concluded that this highlights the need for the sell-side to have flexible and robust electronic trading infrastructure in place, even when electronic trading isn’t a core part of their client services.

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Although these may be early days in the grander scheme of the MiFID II era, the results of this year’s survey indicate that hedge funds are already targeting key areas of algo functionality for review which could go some way to informing strategies and provider relationships.

With providers rated across 14 separate categories of algorithm performance and functionality, the overall score for algo performance this year was 5.47, which, while a respectable score in the face of a changing trading landscape, was still lower than last year’s average of 5.68.

There were decreased year-on-year scores in 12 of the 14 performance categories reviewed, with the only increase seen in the execution consulting category, which is to be expected given the sell-side’s intense focus on this attribute in the run-up to the introduction of MiFID II.

However, it was agency-brokers that performed well in this year’s survey, as banks received largely decreasing scores, or at best consistent year-on-year scores. While many in the industry had expected specialist brokers to be among the hardest hit by the new regulatory regime, early signs suggest that improvements to their algo offerings are doing well among hedge fund clients.

A desire for reliability and simplicity from hedge funds was also evident in the survey, similarly to long-only counterparts as reviewed earlier this year, where in a post-MiFID II environment buy-side firms are less concerned with getting better prices from their algo trading – one of the most significant year-on-year decreases among hedge funds – which around 5% of respondents using algos for price improvement.

The most popular reasons for adopting algos were consistency of execution (14.5%), ease of use (14.59%) and reducing market impact (12.27%).

The survey also found that mid-sized hedge funds were much more willing to engage with a host of algo providers over the course of the year, with the average number of relationships increasing from 1.56 to 4.5.

Clearly these firms are taking advantage of the competition in this space to review their options in the new regulatory environment as a competitive differentiator, going against the expectations that buy-side firms would, on the whole, seek to reduce the number of brokers they dealt with once MiFID II came into effect.

Whether hedge funds continue to engage with as many algo providers going forward remains to be seen, but the onus is now firmly placed on the sell-side, and banks in particular, to outperform and meet the increasing expectations of their clients in what will surely be an ongoing evolution to the markets, as MiFID II becomes less about compliance and more about getting the best returns possible.

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Conducted during the first few weeks of the new regulatory regime, the survey found that trends are already beginning to emerge as to where long-only firms will be specifically questioning algorithmic capabilities.

With providers rated across 14 separate categories of algorithm performance and functionality, there were decreasing scores metered out by long-only respondents in this year’s survey, although there were year-on-year increases in areas such as execution consulting and dark pool access.

Consulting may have become something of a dirty word on the buy-side as a result of the work required ahead of MiFID II’s arrival, but its role in driving algorithmic understanding and implementation, particularly when it comes to achieving best execution, seems to have been acknowledged by the survey’s respondents.  

The customer support category received the highest score from respondent’s this year, an indication that brokers and others on the sell-side have stepped up their efforts to assist the buy-side with the adoption and usage of new technologies under the new regulatory regime.

According to the survey long-only firms have put down a clear marker as to where their priorities lie when it comes to adopting and using algos, as there is increasing desire in the post-MiFID II landscape for algos that provide greater consistency of execution performance, improve trader performance and are, quite simply, easier to use.

While it was expected that many firms on the buy-side would consolidate their lists of algo providers and brokers, the adoption of multiple algo providers has increased almost across the board, with only those on the smaller end – those with $0.25-$0.5 billion in assets under management (AuM) – reducing the number of algos they use, albeit by a small margin.

From the very small (with up to $0.25 billion in AuM) to the larger players (more than $50 billion in AuM), long-only firms have been taking on more algo providers over the past year, even though most are still hovering around the two to three provider mark, possibly with an eye on the new requirements for best execution that have come into play.

Despite this increase in standards expected of both algorithms and providers, the popularity of automated trading is showing no signs of slowing down and even though the technology continues to grow even more complex under the hood, traders are clearly becoming much more comfortable with the systems which allow them to focus their attention elsewhere while still fulfilling their responsibilities.

The full 2018 Algorithmic Trading Survey for long-only firms can be read in full here.

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Speaking on the US bank’s first quarterly earnings call, chief financial officer Marianne Lake explained there was initial concern about a pullback in trading once MiFID II came into force across the region on 3 January.

She said JP Morgan saw “a bit of hesitation” particularly in fixed income and less so in equities, but the market was generally quite resilient in the first three months of the year. However, the bank witnessed a surge in electronic trading across the region, particularly in cash trading, and higher volumes which are increasing its market share.

“We’ve seen material increases in EMEA electronic trading, which we think will be likely somewhat permanent where people are choosing to do high touch cash trading,” Lake said.

“We’re seeing some concentration among players which is to say that we are seeing the industry wallet decline and margins compressed, but for us in particular, we’re also benefiting from higher volumes. We think we’re gaining share and we’re benefiting from some of that concentration among top players.”

JP Morgan saw a 7% increase in revenues within its Markets business, excluding the impact of certain mark-to-market gains and tax equivalent reductions, driven by a surge in equities in the first quarter of the year.

Equity Markets revenue stood at $2 billion, up 25% from the year prior, with a strong performance across products, particularly derivatives and prime services.

“A strong Markets performance was driven by record equities revenue. Our multi-year investments in Treasury Services and Securities Services are paying off, with revenue up 14% and 16% in those businesses,” said Jamie Dimon, CEO of JP Morgan, on the corporate and investment banking business results.

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