UK-based boutique fixed income trading desk BlueBay Asset Management is beginning a new chapter in its life. Now, officially known as the London-based fixed income trading desk of RBC BlueBay Asset Management – the non-North American arm of RBC Global Asset Management which manages US$419 billion in assets – the desk was reabsorbed by RBC at the end of last year moving it from a quaint office based in Mayfair to the lofty heights of the City’s 100 Bishopsgate.
The move has opened up swathes of synergy opportunities for the pure fixed income asset manager, with its traders now working directly alongside RBC BlueBay Asset Management’s equities desk. For head of trading for the RBC BlueBay Asset Management London-based fixed income trading desk, Stuart Campbell, the institution’s combined size is a new strength.
Left to right: Michael Silk, Anita Kaur, Mark Harrison, Deepe Raja, Jo Morris, Ben Thompson, Philip Steel, David Watling, Stuart Campbell, Daniel Grimstead
“Rather than us coming to a technology vendor as BlueBay plus RBC GAM, we can go in as one and that can maybe make your bargaining position a bit stronger,” he says. “In asset management, cost pressures are not going away. When you embed yourself into a bigger organisation, you can somewhat eliminate some of those cost pressures with synergies.”
Headed up by Campbell, the London-based fixed income trading desk consists of 11 traders and is split by developed and emerging markets. The desk has had extremely low turnover thus far, and many of the team have sat in their seats for well over a decade.
Central to its specialism is the close-knit relationship between RBC BlueBay’s trading and investment teams. A bit like a multi-strategy house, BlueBay was once a hedge fund and long only shop and home to as many as eight investment teams with dedicated traders working on each one independently. Five years ago, the firm underwent a makeover, slimming down to one core investment process with one chief investment officer, Mark Dowding, and instating Campbell as head of trading.
However, the way traders’ roles are split up still mirrors that legacy structure with dedicated roles for credit, convertible bonds, FX, rates, repo, local and hard emerging markets. Within each team, traders have their specialisms but each one is able to cover for another and all are expected to contribute to the formulation of investment strategies as well as execution.
“We ask that traders here are not simply executing – in that they’re integral to the investment decision making process and they are working side by side with the senior PMs that lead those strategies,” explains Campbell.
While traders don’t have the authority to load up trades, outside of execution they are expected to collaborate with their portfolio managers to bring value add to the investment process by making suggestions around idea generation and execution.
“You’re taught to almost think like a PM. They want trade generating ideas,” says Daniel Grimstead, developed markets credit trader, and 18-year BlueBay stalwart.
The trading team work closely in tandem with portfolio managers when preparing a strategy. For convertible bonds trader Philip Steel, one of the most important things to assess is how to get out of a trade when discussing getting into a potential trade or strategy. While to the naked eye this attitude may seem defeatist, Steel – who has an impressive 16 years under his belt at BlueBay – says it is essential to breeding confidence in traders when executing.
“That makes a big difference to how big a trade we get into,” he says. “The biggest thing that I ever learned when I first started trading, was that being right doesn’t breed confidence, it breeds complacency. Learning how to be wrong breeds confidence.”
A shifting landscape
At the top of the tree, Campbell’s focus has become ever more centralised around regulatory and market structure change. In the process of being absorbed by RBC, the institution has transitioned from an Aifmd firm to a Mifid firm. It is now one of Campbell’s priorities to manage that transition. All the while, making sense of the plethora of regulatory changes proposed and actioned in EMEA and around the world over the last few years. The consolidated tape, the shift to T+1 settlement, the list goes on.
However, Campbell’s main focus continues to be minimising risk. This, he says, is done by encouraging more electronic trading volumes either through getting electronic VCONS coming back to traders or through full straight through processing (STP).
“I am trying to increase our percentage of electronic trading across the firm because it helps speed, efficiency, rebooking errors, and minimise errors,” he explains.
One such area is the development of the firm’s chosen order management system (OMS), Charles River, and the continuous assessment of whether or not to implement an execution management system (EMS).
“With the advent of Mifid II and more data in the marketplace, the use of an EMS became more appealing for fixed income. A decision a lot of people in my seat would have to make is do you want to employ an EMS besides your OMS or can you get enough functionality out of your OMS to take advantage of new data aggregation, and smart order routing?” he adds.
“One current project we are working on within the OMS is to create alerts from the Neptune Axe data. As something comes close to your target, it will alert the trader so they don’t have to sit there and go through one-hundred-line items every day checking where each level is.”
Developed markets
RBC BlueBay Asset Management’s fixed income developed markets business in London is split by its legacy roles with traders dedicated to investment grade credit and rates, FX and repo, and convertible bonds. While everyone has their specific role, collaboration is key on this team, particularly given the short window traders can have to execute in this news-driven market.
“It’s handy to hear their [PMs and analysts] conversations and understand a theme that they’re looking at. We can join in the conversation and from there we can do a bit of pre work for them before we get any order done,” says Michael Silk, whose trading role spans across IG credit, rates, FX and repo. Silk joined BlueBay 16 years ago in an operations role, moving into trading six years later.
“The type of trades that we do are on the back of news headlines and movements in the market. We have to act quickly on them. It’s not building up over weeks and weeks. We may have the idea that we would like to do something if levels get to this particular target – and obviously anything can spike that movement so we just need to make sure that we’re there and ready.”
Relationships are essential to the developed markets business. For credit trading in particular, around 90% of trades are still conducted by voice as due to the size of orders, market impact becomes a real concern for traders when looking to execute. This makes some electronic and algorithmic methods of trading more of a market disruptor, the team explain.
“A lot of what’s quoted out there by algos is a disruptor in our market because everyone sees the best price that they want to buy and sell bonds at but everyone wants to trade at those prices all the time. That’s not really how the market is trading,” explains Grimstead.
Grimstead joined BlueBay 18 years ago and covers anything to do with European credit, which typically consists of larger blocks, as well as rates and AT1 products.
“Everyone wants it [credit] to trade like in an equity world where you want to buy Microsoft and there is only one Microsoft stock to buy. If you want to buy Microsoft bonds, you’ve got a different currency, maturity. You’ve got so many different opportunities to do things. It just can’t work in that way. From an institutional standpoint, if I want to trade 100 million, that’s not being done electronically,” he says.
“Pretty much every run you see in the US works. The thing in Europe is there’s a lot of runs that go out there that are just a little bit meaningless at times. There’s no intention of it being misleading, but if you ask five out of ten guys, probably five of those ten won’t stand up to anything they send out. Information leakage is key. I don’t want to go out there on a whim and ask someone because they might just pass and say I don’t want to trade that, because then they’ve got all my information.”
Also falling under the team’s developed markets umbrella is the convertible bonds book of business. This is another instrument that relies heavily on relationships, despite orders usually coming to market in smaller size than credit. Convertible bonds are a hybrid of bonds and equities. After buying the bond, its new owner has the option to convert that into equity in that company in the future should they wish to do so. It’s a cheaper way for companies to raise money because they don’t have to pay as much coupon because they’re potentially having to give away equity at the end of that bond’s life.
“In reality, that [conversion] doesn’t really happen because we’re not in it to own part of the company,” confirms Steel. “We’re in it to get the uplift of an equity rally. The convertible bond will participate in that whilst also protecting against an equity crash because it has a fixed income portion as well.”
Future synergies
As a hybrid product that bridges equities and bonds, it is likely an area where the desk could see more synergies following its absorption by RBC. Now sitting on the same trading floor as the equities desk, the two teams are able to collaborate more on cross-product client strategies. Convertibles typically trade in smaller size in comparison with credit but this makes relationships equally as important, says Steel.
“I would rather rely on my relationships and my own maths to make sure that we’re getting the right execution. Talking to someone, I can get a better execution than putting it on a blank screen. But on those days, where I’m incredibly busy, those electronic trades really come in handy because if I’ve got 180 trades to do, realistically, doing them all manually, I could probably give my all to 50-60 of them,” he says.
“Prices on runs generally work in about two million a side. I know that if I’ve got a 30 million trade to do, I can work out the best price without having to ask anyone and then ask one of my best relationships to get me that price in the size. The trust is a big thing because problems occur if they come back and say they can’t do it. Then I either have to let them work on it or open up to someone else what I am doing and that isn’t something I want to do. Letting them work on it might mean we do 10 million and then I have to pay more for the next 10 million and then more again for the final 10 million.”
Newest to the developed markets trading team at RBC BlueBay Asset Management is Anita Kaur who covers investment grade credit, FX, rates and repo alongside Silk and Grimstead. Kaur joined the firm seven years ago, moving onto the trading desk four years later. As a jack of all trades, she covers most developed markets products. For her, it is the ability to consume information and communicate effectively that makes a successful trader.
“It might look like as though you’re sat there trading and negotiating prices all day, but in actual fact there’s quite a lot of price discovery that happens beforehand that you need to be able to relay back to PMs and senior traders,” she explains.
“Even if you’re not trading and you don’t have something active to do – the data that’s coming to you is going to heavily influence how your day goes and whether a PM wants to make an active investment. It’s having a general awareness of what people are interested in and relaying information back to risk takers. You need to have an eye on all markets and what information, or news might be coming out and who it’s relevant for and making sure that your PM sees that information as soon as possible.”
Emerging markets
The desk’s emerging markets business is split up by local and hard currencies. Fixed income is naturally a different beast to equities when it comes to liquidity, but dive deeper still and you’ll find some of the most nuanced liquidity landscapes can be found in the emerging markets across both local and hard currencies.
“Liquidity always plays a bit more of a role in the EM Local markets,” says emerging markets trader, David Watling who covers emerging markets local FX, rates and bonds and has been with BlueBay for almost two decades. “There are also the technicalities of trading the different currencies and the settlement issues surrounding those. DM is quite straightforward in and out, lots of liquidity.”
For Deepe Raja, hard currency sovereign and corporate debt emerging markets trader set to celebrate his tenth year at BlueBay later this year, it’s the range of country-specific macroeconomic factors that influence liquidity in the emerging markets which make them so interesting to trade. Hard currency traders execute emerging market sovereign and corporate debt, denominated in a non-local currency.
“Emerging markets sentiment is largely driven by the broader macro risk tone across rates, equities and commodities, in conjunction with idiosyncratic stories, geopolitics and economic data releases that are EM country specific,” he says. “It’s more all-encompassing trading emerging markets than it is another asset class.”
Core relationships
It is because of the emerging markets liquidity landscape that relationships are essential. Broadly speaking, emerging markets as an asset class is less liquid than developed markets, and within that credit even more so.
“Trading emerging markets credit for the sell-side is more capital intensive and requires more balance sheet usage. In an environment where bank cost of funding is increasing with rising rates they are more selective in terms of how the balance sheet is deployed. If you have an established relationship with a bank trading desk they will naturally be more inclined to deploy balance sheet to facilitate your trades,” explains Raja.
“There may be instances where an electronic trading platform is used for efficiency, namely programme type inflow/outflow trades. Occasionally, we also use an RFQ trading venue for say $3 million to $5 million notional size of a liquid credit if our direction is contrary to risk sentiment on a given day, for instance buying into weakness or selling into strength which can often result in attractive trade entry or exit levels.”
Working in tandem with Raja in this area of the business is 21-year and 16-year BlueBay longstays Jo Morris and Mark Harrison. Harrison has been in the industry for almost 43 years, seeing the markets through some major shifts and events. My word is my bond, he says, stressing the need for a handful of core counterparties that can be relied upon come rain or shine.
“There are five or six banks that I have a global partnership with and have the backing/support of their global heads of sales and trading. This close relationship helps when we have very large rebalancing trades to do. They will price the block size for me sometimes even in credits they would not normally trade,” he says.
“Emerging markets trading can be more challenging than developed markets due to the overall size of the markets. When executing larger orders, you need to work in with the sell-side and be 100% transparent with this approach. It’s when you speak to the wrong people that the information flow can get into the market and prices change drastically.”
However, in light of the importance of relationships in the emerging markets credit space, turnover on the sell-side in their emerging markets trading teams – especially in the US – has become something that acts as a hindrance to liquidity access, Harrison explains.
“It is really hard for the big banks to build and maintain a global franchise with this turnover of traders,” he says. “Banks are always looking to win market share and employ the best people, so if needs be they will pay up for the right person and that can cause a kneejerk reaction and a merry go round of trader moves.”
Local nuances
For emerging markets trading, the devil is in the detail with how a trader approaches executing on behalf of their portfolio manager. Different jurisdictions have different levels of volatility, different approaches to market structure – whether that be relating to front middle- or back-office – as well as varying levels of electronification across their markets.
“If banks are trying to specialise in particular countries or regions, you’ve got to be on board with them. You can’t ignore them even though some of our tier one banks are present in those markets,” says Ben Thompson, emerging markets local currency trader who has been with BlueBay for a decade.
RBC BlueBay now uses FXall and MarketAxess in its emerging markets businesses, however, when Thompson began trading emerging markets, the electronic platforms offerings were limited, in particular for bonds or FX.
“I’m very limited on the size of flow which I’ll put down the platforms, particularly in the less liquid market,” he adds. “It is mainly used for smaller inflows, outflows, market adjustment trades, anything large or sensitive would always go by voice with some of the more trusted banks that we use.”
The nuances of local emerging markets liquidity come from the local funding of bonds and the restrictiveness of currencies, fellow emerging markets local currency trader Watling adds. “You have to fund some currencies through the custodian, so you have to understand the settlement process as well as speak to people onshore. Not only are we talking to people in New York and London, but we’re also speaking to people in Mexico and Brazil and some of the local brokers out of Lima and places like that.
“It’s the old school conversations as well with some of the instruments, especially the local corporates where you’re going out and talking to the trader asking what they’re seeing, what other counterparties are seeing and doing and then trying to get a picture from a few people of what’s actually going on in the market and where the real price of the instrument is.”
A lot of the time the liquidity landscape means emerging markets traders aren’t usually too hasty to execute, ever mindful of the potential impact on the market they may have. The price will likely move but then come back.
“It’s not necessarily taking a price, often we’re out there just working a price instead, so showing them our interest and getting them to approach local participants and work orders for us that way,” says Watling.
In light of this more cautious approach to execution, reliable data is essential to know how and where to price. However, there lacks a consolidated source for some of the more illiquid local markets. Traders must instead piece together the picture using any information they can get their hands on alongside typical sources like axes.
“There tends to be three prices in every trade – where the PM thinks it is, where I think it is and where the bank thinks it is. It’s very rare those are in line. This can change again depending on the size of the trade,” says Thompson.
“We try not to pay up too much for the liquidity but still remain mindful about how we may impact the market with our trading. Where possible we tend to take a slower, more gradual approach into trades rather than just go all in. Over time we’ve learned – particularly in some of the more liquid and volatile EM products – you do get a more than one opportunity. More often than not that a price will move but then it will come back.”
Cross collaboration
Formerly boutique and now part of a global bank, the London fixed income desk at RBC BlueBay Asset Management has an opportunity to play a completely different role for its clients, something few trading teams have the chance to do in their lifetimes without moving firms. While there are opportunities for both the developed and emerging markets teams to further work together on larger strategies across funds, there are also ways that the desk’s new role as the fixed income arm of RBC BlueBay will allow it to cross-collaborate.