[ M A R K E T
R E V I E W
maintain 10-20 APIs to connect to
their main sell-side counterparts,
nor do dealers want to maintain
different APIs to their 100 best
clients. There needs to be a utility
to connect us all together, allowing
direct connectivity to and from our
execution management systems.
We’re digesting lots of data sourc-
es, we have multiple tools and an-
alytics running, and we want to be
able to engage the market efficient-
ly at the point of risk transfer. We
can’t do that right now and often
have to resort to voice trading.
How are you evolving the skill set
on your fixed income trading desk?
LS: It’s increasingly important that
traders are able to set up systems
optimally and to adjust rapidly to
changing circumstances. We don’t
need coders on the trading desk
necessarily, but we do need access
to coders. Data helps us to predict
trading costs. So especially for
more passive mandates, the trader
needs to be more agile to pull in a
whole different set of wish lists,
axes, and prices.
Even large asset management
firms are running fairly lean
trading desks, which means we
need our traders to be equally
comfortable doing an automated or
a voice trade, giving market colour,
filtering information, interacting
with the market, and above all
guaranteeing the best outcome.
JS: We still need the people with
20-30 years’ trading experience,
but we’re interspersing them with
traders that have smart order
routing skills, or the ability to
write code. There are also similar
developments in our analyst and
portfolio management teams.
It’s important to have diverse
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experience on the trading desk. We have traders
that have traded on all three of emerging markets,
investment grade and municipals, while others have
moved around between desks geographically. An ideal
candidate is someone with equities experience as it is
clear we in fixed income are now following the same
path. When I first talked to our equity guys, I learned
about dark pools, all-to-all trading and direct connec-
tivity, but I also heard about illiquidity and fragmenta-
tion, which are not words I expected to hear from an
equities trader. They are a lot further along with the
electronic process change, mostly because of regulato-
ry drivers. In fixed income, we’ve had relatively little
direct regulatory intervention, but we all recognise
that to compete going forward we have to be able to do
things in a much more efficient manner.
MO: The role of a buy-side fixed income trader has
changed pretty dramatically since the financial crisis,
albeit the change has been more of a slow evolution
over time than a big bang. Prior to the crisis, when
liquidity was abundant, buy-side traders were primar-
ily execution focused, achieving best price by calling
round a handful of counterparties. That type of trader
is no longer relevant. Today, buy-side traders need to
develop a deep understanding of portfolio construc-
tion, market structure and bond valuations in order to
contribute alpha to a trade. So, yes, we are looking for
our traders to have different skill sets, but that is a re-
cent phenomenon brought about by electronification.
Our growing use of the tools that enable automation
are the result of that change, not the cause.
LS: We are keen to increase automation levels, but
the priority remains the best outcome for our clients.
Rather than being too rigid, we have to empower the
trader to make the decision. If the trader thinks it’s not
the right situation for an automated trade, they should
be able to work it in a different channel. If you replace
human traders with purely automated tools today, you
won’t get the necessary flexibility. If the market keeps
going wider, sometimes you have to stop and consider
other options, perhaps by working
an order agency rather than risk.
“The most liquid markets
We will continue to automate,
but only where we think it will
are the ripest for new
benefit the client. Some of the
trading protocols to
markets in which we trade are still
develop.”
quite manual, such as the sterling
credit market. You can automate
MIKE O’BRIEN, EATON VANCE
[ M A R K E T
pre-trade data inputs, but you’re not going to neces-
sarily trade a larger sterling order of a long-dated ster-
ling bond via an ECN. You’re still going to look for a
single axe and make a judgement as to whether that’s
the best outcome, given that asking more brokers
could impact your market. For now, the benefits of
automation lie in liquid asset classes such as rates and
FX, and less in illiquid emerging markets, high yield,
and investment grade markets, in something like US
Treasuries the human trader many not be able to add
too much value in normal market circumstances.
The US Treasuries market has recently seen new
platforms, protocols and liquidity providers. Is this an
example of the kind of market in which fixed income
traders must expect to trade differently?
MO: The most liquid markets are the ripest for new
trading protocols to develop. On the other hand,
they’re also the ones where the buy-side is most likely
to rely on old habits. High levels of liquidity allow new
trading protocols to gain traction quickly – but also
permit the buy-side to remain dependent on RFQ. The
RFQ works in the US Treasuries market: you are going
to get responses back. In other areas of fixed income,
it might not work so well, forcing firms to find other
ways to trade. We’re looking at the tools and keeping
an open mind on new ways of doing things. But that
doesn’t mean the end of RFQ. We prefer to take more
of blended approach.
A central part of my role is to give my traders as
many tools as possible with which to execute trades.
But they are in the best position to judge which tool is
appropriate on a trade-by-trade basis. I need to be in
the market, understanding what the various approach-
es to trading are and which ones could be relevant to
us, in order for them to make decisions on individual
trades.
This certainly extends to
the new ways in which
electronic liquid-
ity suppliers
are providing
liquidity
through
some of the
established
electronic
trading
platforms
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in the more liquid fixed income
markets. Any new source of
liquidity is of interest. I don’t want
us to get rid of the old protocols as
there may be cases where they are
still appropriate, and that includes
sourcing new types of liquidity
from existing
platforms and
“ I think it’s important to
protocols.
constantly question the
To what
extent is it
status quo, and envision
useful to look
how we would design a
to the equities
function or technology if we
market for
were starting from scratch.”
strategies/
technologies
DAN VEINER, BLACKROCK
that can help
optimise fixed
income trading and investment
processes?
DV: Certain concepts translate well
from equities to fixed income. For
example, equity portfolio trading
is a 20 year-old protocol, and the
data, automation and transparency
is at the stage where fixed income
trading has adopted it. Bilateral
FIX lines and FIX hubs, which I
mentioned before, are other ones
borrowed from equity. For very
liquid, standardised instruments,
such as on the run US Treasuries,
government bond futures and
ETFs, agency algos are important
tools in fixed income that were also
borrowed from equity.
At the same time, many attempts
to ‘cut and paste’ from equity have
failed due to structural differences,
such as the heterogeneity of bonds
and rates derivatives. An example
of this would be credit or rates
dark pools that have had to get
very creative to prove relevance in
order to overcome the difference
between agency equity trading vs
OTC fixed income trading.
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