How has this year been for you so far?
We’ve had so many events in the market: from Covid to the Ukraine war to the mini-budget, central banks being hawkish, rate hikes – so there’s been a lot of volatility. This has resulted in increased volatility, so trading costs have gone up. In the past, small lines you could trade very easily, but you’re now having to work a lot harder – sometimes we’re only getting one or two prices back. So smaller size trades are taking a lot longer – trades where we’d usually just use automation and move on to high touch trades, we now have to spend more time on, which means we have less time to focus on high touch, because we’re having to spend more time on what should be low touch. We’re now thinking smarter about how we can adjust our parameters for automation for this environment to make sure we are still optimally using technology and benefiting from the efficiencies we’ve established. This may mean fewer quotes, a longer time limit, and so on.
How is your team coping with the change?
Our team are traders and portfolio managers, and it’s all hands on deck. We’re all learning things, all the time – this period has been intense, but a great learning opportunity. For years, nothing changed – now, every time we look at the news there’s something else we need to take into consideration. It’s an eye-opening time. Things are better now though – the worst time was through Covid, when screen levels were not reflective of where risk was clearing.
“The key is to use automation to our advantage to help us navigate volatile markets.”
There’s a bright side though. We’ve been exploring different platforms, finding new sources of liquidity, and especially, learning how to use automation to our advantage. There are lots of exciting new elements now, such as using algos that work your trade slowly in the background. You just set parameters, and it works that trade for you, breaking it up throughout the day instead of executing in one big block. It can help you get better execution and better liquidity.
The key is to use automation to our advantage to help us navigate volatile markets.
What developments are making your job easier?
Bonds are not like equities, there are so many and there won’t always be liquidity in every bond. There’s been a big rise in portfolio trading over recent months, especially sterling portfolio trading, which has seen volumes shoot up. It’s an additional tool in our toolkit, and can save a lot of time, because instead of five traders trading 100 lines each, you can hand all that to one portfolio trade. We still do a lot of pre-trade work, obviously, but it can make things more efficient. In addition, it can result in reduced overall cost of execution when we trade as a package.
How has the gilt crisis impacted your job?
Thankfully we don’t hold any leveraged positions, but given the extreme market moves and volatility in the UK market we were diligent in maintaining liquidity and maintaining our risk tight to the benchmark.
What has been your biggest challenge this year?
There has been a huge increase in issuance, but at the same time, bank balance sheets have not been growing at the same pace, so we need to look at additional liquidity sources – and I think that buy-side participants can do more to fill that space.
“Buy-side to buy-side simply hasn’t taken off yet in fixed income, and that needs to change.”
Buy-side to buy-side simply hasn’t taken off yet in fixed income, and that needs to change. There are no established protocols or platforms for this to to happen in scale. The industry still needs to evolve to be able to facilitate this, but it will be an important development for the fixed income markets if we are able to do so.
All-to-all trading is taking off on platforms where a trade will go to all signed-up participants – and it is a great source of additional liquidity. But you’re not going to send a big trade there, because there’s a lot of price and information leakage.
A consolidated tape would also be a step forward and is coming. This will entail having more access to prices that are traded, in a timely manner. The question is how long will this take and in what form?