Buy-side Perspectives Issue 16 | Page 18

FIXED INCOME At Candriam, we employ different execution methods with the constant aim of lowering transaction costs. Price making in fixed-income is more about how you approach your flow (pre-trade checks) than a process in itself. Our challenge is to have the best possible idea of where a block can be executed before even asking the street There is also a clear difference between making a price as a market maker and making a price as a buy-side trader. As a market maker, it’s ok to miss a trade if it does not fit your book. You also have to give a continuous price service to your clients. As a buy-side trader, you have to trade. It’s not about knowing the bid offer context, but where the parties can meet to achieve the best return for the fund. For which asset classes and types have you developed these approaches today? In terms of asset classes, of course a price making process does lend itself to illiquid assets such as high yield, emerging market debt or convertible bonds. The method can be applied to any “blockable” situation. Each buy-side trader should be able to Negotiating is the assess its own price heart of our job impact and if the quote received by a market maker is acceptable or too defensive. All of it without waking up the whole market. 18 In which situations and context would buy-side price making be applicable? Firm price making, when you intend to rest an order, is based on a few conditions: • Low liquidity and a decent size to buy/sell. • A decent market picture, having a good idea of where the price context lies. • A good relationship with your portfolio manager to establish the time frame to fill the order. There are two ways to look at it and I believe the level of urgency of a trade is key. In negotiation textbooks, ‘time’ is an important asset to hold when you want to explore alternative ways to achieve a better outcome. But the main considerations are: • If the order has a high urgency and you can execute at a decent price (following your best execution process of course), then try to trade! • If the order is urgent but you believe 100% that you can get hit/lifted at a better price in a short period without losing the quote received, then try to get an improvement by giving your target. It never hurts to have a discussion. • In low urgency situations with stable & illiquid markets, try to reduce the market noise. It can be better to work such orders with a reputable sales/ broker representative to tap potential natural buy-side players. Alternatively, you can submit an indication of interest to a buy-side to buy-side crossing system that gives you access anonymously to more liquidity. Obviously, the link with the portfolio management team needs to be constant in those situations. Leaving a price is an active matter, as you constantly need to monitor and adjust it to market conditions. www.buysideintel.com As a trader, you can reduce the perceived urgency of a trade by providing an adequate market color assessment to your portfolio manager. If you believe the opportunity cost of trading now is bigger than the improvement you can get by taking your time, and the portfolio manager is comfortable with your analysis, then you have the opportunity to generate incremental alpha through your trading. For illiquid markets it is of course tough to quantify the potential impact precisely as you will never know where you can trade in one go. Subsequently there is a risk that you could affect your market for nothing in return as the underlying data for your decisions is lacking. But a qualitative assessment can still be done, as portfolio managers should already know and have noticed that you as a trader are adding value. For example, you might go to the sell side specifying €10 million of a bond to offer at a specific price and check with 1 or 2 competing counterparties just before completion for €1 million to verify that you are achieving best execution Which tools (platforms and pricing tools) are needed to make the informed pricing decisions? You need both pricing tools and execution tools. I am a firm believer that you need to be able to price and understand what you trade. You cannot do your job properly without having a firm grasp of all the inputs that affect the pricing of the asset traded. The “pricers” do not need to be complex, but you need to be able to explore the various input to assess and decide. For execution per se, you need good platforms for RFQ or buy-side to buy- side trading. It allows you to gather the most liquidity possible, but let’s face Summer 2019