[ I N - D E P T H
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P O R T F O L I O
You might consider request
for quote (RFQ), but this trade
is potentially market moving, so
adopting the RFQ model to trade
multiple bonds at once could
materially impact price. More-
over, unless they are structured
as a package trade, where risk can
be mitigated across more liquid
bonds, broker-dealers will find
it almost impossible to price the
illiquid bonds. Purely from an
efficiency standpoint, a portfolio
trade for this type of transaction
makes sense.
Tradeweb claims to be the first
electronic trading platform to
roll out portfolio trading func-
tionality for institutional clients
looking to streamline executions
into fewer, larger trades to lessen
both market impact and cost. The
platform went live in January, with
Tradeweb’s latest figures showing
that as of August this year, more
than $18 billion has been traded on
the platform so far, accounting for
5.5% of TRACE volume.
Typically, a portfolio trade
consists of a basket of between
10-100 bonds that can be either
one or two-sided and executed in
a single transaction with a single
liquidity provider. More commonly
recognised as basket or program
trading, the protocol has been part
of the landscape for a while, but
with the electronification of global
bond markets and a surge in fixed
income exchange-traded funds
(ETFs) – which in June surpassed
$1 trillion in assets – portfolio
trading is tipped to become one of
the most efficient ways to deal with
large, complex and multi-faceted
bond transactions.
“Portfolio trading used to be
laborious and complicated,” says
Chris Bruner, managing director
and head of US credit at Tradeweb.
“Even if you wanted to do a port-
folio trade with a single coun-
54 // TheTrade // Fall 2019
T R A D I N G ]
terparty, it would require lots of back and forth with
spreadsheets and phone calls to generate those prices
and decide which bonds you may or may not want to
include in the portfolio.”
Order routing, pricing and negotiation
There are various reasons why a portfolio trade could
be on the cards for a buy-side trader. Perhaps large
outflows in a fund has forced the need to raise cash
quickly, or a transition management agenda means
that you’re now selling investment grade and buying
high-yield. Maybe a credit analyst has recently gone
negative on a ticker, or a large portfolio of illiquid
bonds are being asked to buy or sell.
Traders can complete a portfolio trade much like
they would a regular RFQ on Tradeweb’s platform
without changes to pre- and post-trade workflow,
according to the vendor. When choosing a portfolio
trade on the platform, orders are routed to the right
person at a liquidity provider - such as a designated
“We’ve been surprised by how consistent the
portfolio trading has become in such a short time
frame. The nature of portfolio trading is that it
can be big and chunky, which sometimes means
it’s also sporadic.”
CHRIS BRUNER, TRADEWEB
bank portfolio trader who will likely have more expe-
rience in the fixed income ETF ecosystem than a line
trader - so that baskets of risk can be priced leveraging
the create/redeem process. Order routing is key here
when it comes to pricing risk, and it can vary by each
potential counterparty according to whether they dis-
tribute pricing across the whole desk or, in some cases,
have a dedicated team of portfolio traders.
Once the trade is on the system and routed to a suit-
able liquidity provider, a bank portfolio trader prices
the individual line items with aggregate basket port-
folio-level statistics, which are displayed by Tradeweb
to guide both sides towards the right price, and to
provide pricing for the portfolio trade in its entirety,
rather than at the individual CUSIP level.
The buy-side and dealers then negotiate and counter
on individual bonds within the portfolio, and if it
doesn’t suit, the buy-side trader can remove individual
CUSIPs from the negotiation before executing the
approved items all at once.