Algo and portfolio trading have seen a sharp rise in usage in the last few years, but this growth spurt is likely to be spurred on further by the rise to fame of fixed income ETFs.
The growth of the fixed income ETFs market is set to be a key theme at this year’s Fixed Income Leaders Summit (FILS), having seen a sharp increase in usage by traders as a lower risk strategy amid market conditions.
Speaking in a new frontiers on fixed income liquidity fireside chat, head of fixed income at Flow Traders, Ramon Balje, said fixed income ETFs had now reached $1.7 trillion in AUM and predicted this would grow to $5 trillion in the next five years, adding that ETFs now accounted for 10% of the credit market.
“There is no denying there is big innovation taking place in fixed income ETFs and their interaction with the bond market,” he said. “Portfolio trading is the most natural way to make them interact.”
Algorithmic trading – now a firm pillar in firms’ fixed income execution strategies – was also a key topic of discussion and was noted by panellists as central to the evolution of how liquidity providers were adapting to support the buy-side in the current market ecosystem.
Exceptional and challenging liquidity conditions were predicted as here to stay for the foreseeable future, with panellists noting that market depth was subsequently likely to be lower as participants adapt to the new normal.
“Traders need to source the best price and proactively think about liquidity and the impact of their actions,” said head of EMEA credit trading at JP Morgan, Sanjay Jhamna.
“Firms need to adapt their algorithmic strategy to be an all-weather liquidity provider. As liquidity becomes more challenging algos bring more value to the table. They’re adaptive and inherently fast in price and distribution. They also allow for the systematic bridging between the bonds and bonds ETFs markets.”