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.
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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