Chicago-based head of US trading at Legal and General Investment Management (LGIM) Ryan Raymond has seen enough economic turmoil during his career to know what to do when markets turn volatile. Specialising in fixed income, specifically credit, Raymond has over two decades of trading experience under his belt.
Originally destined for a role in tech, with a brother and uncle both working in this sphere, it was when the tech bubble burst while Raymond was in college that the financial industry caught his attention.
There are few in this industry – and outside of it – that haven’t heard about the events in the late 90s and early 2000s that saw the dotcom bubble burst and send markets into disarray. It was then that Raymond found his passion for an industry he might never have otherwise noticed.
“My brother and uncle are in that field. I was part of the generation where computers were a big part of growing up so I thought I would join that industry, but then the tech bubble burst in college and I couldn’t find an internship in that field,” he explains.
“[After finding an internship in finance] I thought ‘these are really big dollar amounts that people are moving around. They’re making smart investments based on fundamentals, what they’re seeing in the market and on the conversations they’re having with people’. I quickly fell in love with this industry without even knowing it existed.”
Finding fixed income
After spending three months as a trading assistant intern at PPM America, Raymond landed his first permanent buy-side position, joining UBS Asset Management as an operations assistant in 2003. He subsequently moved into a role on the money market and short duration team focused on multi-asset accounts, money markets, and enhanced cash funds, among other products, serving in this capacity for eight years before moving over to the investment grade credit team.
Raymond joined LGIM as its head of credit trading in 2019 when the asset manager was undergoing the process of splitting up its portfolio management and trading capabilities.
Raymond was starting a family and looking for a new opportunity. “Chicago is a very small community and so I knew most of the portfolio managers and management at LGIM America before I came over. When I joined, that helped to smooth out the transition for the existing portfolio managers who were moving into split PM and trader functions,” he says.
In his first role at LGIM, Raymond was responsible for overseeing its credit trading business out of the US. It was during the start of the Covid pandemic in 2020 that his remit was expanded, taking on responsibility for the equities and foreign exchange capabilities at the firm.
Equities was already a globalised product and in 2021, LGIM opted to globalise its fixed income product offering. Raymond’s team of nine, including himself, now handles all the US dollar trading flow globally for LGIM out of the US.
His trading team is structured using a specialised approach with each individual having a market area that they are responsible for. Raymond himself specialises in energy and basic industries.
“Our desk set-up is very effective because we can develop relationships with the sell-side at a deeper and more meaningful level,” he explains. “There’s an argument to be made for splitting it by high and low touch as opposed to fixed income and equity etc. But, right now, I like having it split because it’s a different product. It’s different needs for our clients and our fund managers. If you want to be successful, you need to really understand what their needs are.”
Raymond’s career has had a constant fixed income spin to it. While he acts in a backup capacity for FX and sometimes equities, he is most active in fixed income for credit which he confirms is LGIM’s biggest book of business. For Raymond, it’s the layered nuance and the additional challenge when it comes to fixed income trading that has kept him coming back for more.
“Fixed income is unique in comparison with equities as you’ve got all these individual securities for one issuer. Whether that’s for better or worse, you can argue both, a company can have any number of different bonds,” he explains. “It’s fun sometimes to say this is the security that I think is going to perform the best. It adds another element of challenge that I’ve enjoyed, and that’s why I’ve stuck with fixed income through my career.”
Flying through turbulence
The US has had an “interesting few months” as Raymond puts it. Despite the threat of a recession looming in the second half of this year, the Federal Reserve’s first rate cut is only expected to take place on 18 September and there remains uncertainty around how quickly rates will come down before year end. The activity has sparked concern with many who are now watching the central bank closely in order to price in any associated risk.
Paired with the upcoming election this makes for a heady cocktail, especially given the fact that more turbulence is expected on the horizon. Helming the US business of one of the largest asset managers in the world through such a course is no mean feat. For Raymond, the focus is now on whether the firm should be de-risking, something he intends to achieve through portfolio diversification.
“I don’t think the market is fully pricing in the some of the risks along the lines of the Fed. We’re a little bit more conservative in our approach right now,” he says. “We’ve largely been focused on whether this is an inflection point in the market and do we need to de-risk ahead of it? We’ll probably use a mix of primary and portfolio trades to move that risk quickly frankly. That’s taking up a lot of the time from a strategic standpoint.”
“Credit markets have been fairly stable this year. We’ve seen the range of the US credit index primarily trade in a 10-basis point range. Until recently, we’ve broken out of that, but the real question is, have we broken out of it or are we just resetting that range a little bit wider? That’s the question that the market is going to answer over the next few months here [the US] to see what’s really going to happen.”
“The other side of that is supply has been much higher than we anticipated. We expected supply to be very high in the first quarter, but all the colour that we were receiving was supply would slow in the second and third quarter. Both quarters ended up with heavier than expected supply. That has weighted on markets as well. What’s really key is being nimble in the market.”
Remaining nimble is something that the largest asset managers across the globe struggle with to this day, particularly in times of unpredicted supply. For Raymond, the solution is simple, leveraging different areas of your investment portfolio to ensure you have the option for a quick turnaround when one is required.
“We used to view large asset managers as these aircraft carriers that would take months and months to shift their positioning. That’s not the case anymore. If you look at it from a top-down standpoint, you can move very quickly in the market with minimal wake using a mix of primary supply, portfolio trades and big chunky portfolio trades all at the same time,” he explains.
“All of those hit the market in different liquidity fashions so that the wake behind you is smaller and you’re no longer this aircraft carrier but instead a much smaller vessel that moves faster. Given our setup on the trading desk, and because of the way that we approach portfolio trading, we are in a position to be extremely nimble across all of our products. We use a combination of primary markets, portfolio trading and traditional secondary block liquidity to adapt our portfolios to any changes that come very quickly and cost effectively.”
Portfolio trading expertise
Central to LGIM’s nimbleness and diversified strategy is portfolio trading. Something that Raymond confirms LGIM specialises in. Portfolio trades allow traders to execute a basket of stocks in one single transaction, minimising costs and allowing traders to bundle less liquid or more difficult to trade instruments in with more liquid transactions. The concept has exploded in the last few years, egged on by market conditions and volatility brought on by the pandemic and other macroeconomic factors.
“We’re very fast at it [portfolio trading], so if we get the idea in our head that the market is turning we can turn that into a trade within a very short period of time and execute that day if we want to and move the entire direction of our portfolios. It’s [portfolio trading] the way the market is going and swimming downstream with liquidity instead of fighting it is a sure way to reduce transaction costs.”
LGIM has completed over 1,000 portfolio trades since 2020, averaging more than one a day with an average transaction cost of half a basis point and accounting for around 36% of the asset manager’s fixed income business.
When Raymond first came across fixed income exchange traded funds (ETFs) however, – the renowned catalyst for the explosion of portfolio trading seen in the last four to five years – he was not convinced.
“When I first heard about fixed income ETFs, I said this is not going to work and this is going to decrease liquidity in fixed income. I was completely wrong,” he explains.
“It’s almost like fixed income is catching up to equities now. As things have become more electronic and technology has built into these processes, fixed income has adapted some of these equity elements. That’s what fixed income portfolio trading is, it’s using an equity product or process. Fixed income ETFs have allowed portfolio trades to happen.”
“In fixed income, the algo use on the sell-side has seen a big increase and that has fed into why portfolio trading has been so successful as well. The ability for the street to price a lot of these smaller securities quickly and efficiently has really changed and it made the market a lot more liquid in the smaller sizes.”
According to Raymond, portfolio trading has had significant impact on the fixed income liquidity landscape. The protocol has boosted top-down liquidity – focused on macro-economic factors – and dried up bottom-up liquidity – focused on a company’s fundamentals, he explains. A result that has had both positive and negative impacts.
“The top-down liquidity that you see because of portfolio trades is remarkable. Frankly, you have more liquidity in fixed income markets now than you have had since at least the financial crisis from a top-down level,” he explains.
“The other side of that is the bottom-up liquidity when trying to buy a lot of a single name is much worse as more focus has gone to top-down. It’s also drawn some experience down and so the knock-on effect is that bottom-up liquidity is reduced. If you need to trade three hundred million in Kraft then it’s a lot harder now than it used to be especially pre-crisis. But even from a post-crisis level, the liquidity was worse.
“The street goes through an evolution over time. What we’re seeing partly because of the volumes being traded in portfolio trades is that there is a focus to move that risk. That is a very different skillset for the sell-side than it is trying to move 300 million of a single name. The street is focusing on this top-down element and so there’s less skill on the bottom-up side. That provides an opportunity for a firm like us where we are very bottom-up focused in our research and our capabilities.”
A data-focused future
Raymond’s focus, as with many other heads of trading, is now on the fine tuning of its processes using data. The future focus is centred on fixed income, which he claims has a way to go when compared with equities or foreign exchange given the nature of those businesses.
“In fixed income, it is a lot more difficult to run the same kinds of analysis [as equities and foreign exchange]. I might get an order in the morning for 20 million to trade and I might only be able to trade 10 or I might be able to take zero,” he explains.
“I have to work that order and the market can move throughout the day. If I’m measuring my personal performance on that trade versus when I received that order, it might look really good or it might look really bad based on what the market does and based on the liquidity of that individual trade. If the market got better at analysing that would add a lot of value.”
Central to several ongoing market discussions on the buy-side is the use of data pre-trade to better inform trading decisions, and LGIM is no different from its peers in this regard. Pre-trade particularly when it comes to LGIM’s portfolio trading business is front and centre in Raymond’s mind going forward.
“Having done so many portfolio trades, we have a very good idea about who is going to win the trade or who is going to be competitive. But we’re doing more work to be better about that – we’re doing more work for beta portfolio trades where we’re trading 100-line items because we want to add risk or to take risk off for the portfolio,” he adds.
“What we’re trying to do there is partner with some of the electronic trading platforms that we trade PTs [portfolio trades] on. We have data on the 1000 portfolio trades that we’ve done over the past four years. They have data on everything done on their platform and in the market. I want to reduce transaction costs but keep the top line steps of my portfolio – the duration, the spread target, the ratings target – and keep that within a 10% range of where I started.
“How can I optimise for transaction costs? OK, let’s take out these five securities and I can optimise for transaction costs. Let’s get really fancy and say let’s optimise for 50% transaction costs and 50% spread. What does that look like? Can we talk about substituting securities to do it? If we can get to the point where we can do that ultra-efficiently in a nice GUI and can make that decision within seconds based on the analysis and the previous performance of thousands of portfolios, we’ll have a huge competitive advantage. Even if it’s rolled out to our peers, being part of that development and knowing how to use it puts us and our clients at an advantage.”
The onus is now no longer on gaining access to data in fixed income but instead on how firms can find ways of turning data into useful information to be used on the desk whether that be via inhouse or third-party vendor solutions, Raymond concludes.
“There are some really hard conversations that need to be had across the street. Getting the data is one thing, analysing the data and turning it into useful information is a whole other ball game. Finding the right way to do that, whether it’s an in-house solution or out of the box solution that is paid for, is a really hard conversation.
“Frankly, the answer is probably mixed, but how that plays out will be really interesting to see. For us, we do a lot of data aggregation and we’re trying to build out as much as we can internally. Do we use an EMS or another third-party solution to help sort that data and turn it into actionable events? That’ll be something we keep assessing.”