Curatia: Exclusive Q&A with Tradeweb
Chairman of the Board, Tradeweb Markets
This article originally appeared on Curatia.com here.
Lee Olesky’s business philosophy fuses a dogged day-to-day focus on clients’ needs with a holistic, long-term approach to the fixed-income space’s technological evolution.
Those principles not only explain the trading platform’s stunning success to date but also provide a blueprint for its future, giving them resonance for executives at other firms determined to leave their mark on the realm of finance.
1. Electronification trends: From Tradeweb’s landmark IPO to a big 2019 electronification push and the turn to bond trading platforms for liquidity during the coronavirus crisis, the last 12 months have arguably been electronic bond trading platforms’ best ever. Is the space ultimately winner-take-all? Or is there room for multiple platforms with different specialties to coexist peacefully and prosperously?
Clearly, the scale of the opportunity for platforms like ours is significant. In Q1, our firm traded around 11% of our $7.6T total addressable market per day. If I step back from the significant volumes that transact on Tradeweb every day and look more broadly at a product like interest rate swaps — which is an enormous market, but where less than 25% of trading is electronic today — then clearly there is still a very significant opportunity for greater electronification.
The other thing I would say is this: Clearly electronic markets vary by the types of clients, geographies and asset classes they serve. But there is also diversity in how we work with clients, how we approach product development, and a host of other issues that play a role in our success. We think about this a lot and, yes, we compete hard — but it has to be for the benefit of clients rather than competing for ego’s sake.
2. Global growth strategy: How have recent events like the coronavirus crisis and flaring US-China tensions changed your thinking about Tradeweb’s global growth strategy — penetrating the Chinese government bond market, for example?
In many respects, the reason we were able to respond quickly to the health crisis was precisely because we already had folks on the ground in China and in Southeast Asia. Our experience there — of mobilizing our staff to work from home, of serving customers as they set up their desks from scratch at their dining room tables — was instrumental in shaping our approach in Europe and the U.S. so that we could move the entire team remote seamlessly.
More generally, and without commenting on trade talks because it’s simply not my role to offer an opinion on such things, we always take a long view when it comes to our global growth strategy. We are willing to invest the time and effort to get things right. Focusing on the end goal also has the added benefit of helping to cut out a lot of the headline noise.
3. Corporate journey: You co-founded Tradeweb in 1996 — back when email was still shiny and new. One could say you were early to the fixed-income electronification party, but were there advantages to a slow burn for you or Tradeweb such as getting to watch the market unfold?
When we were writing the business plan for Tradeweb, one of the things that really informed our thinking the most was the change that was already underway in FX trading. I remember very clearly looking at venues like EBS, and then weighing what would or wouldn’t work for U.S. Treasuries. At the time, of course, there was also significant change in the U.S. equities markets with the arrival of ECNs, so while we were one of the very first to use the Internet for bond trading, what everyone else was doing elsewhere was instructive to our initial approach.
Since then, we’ve kept up a good habit of being first when it suits our clients. For example, we were the first electronic platform to offer access to the Chinese onshore bond market, the first platform to offer dealer-to-customer tri-party repo, and the first to automated intelligent execution with AiEX.
Equally, though, if we’re not first into a space that doesn’t put us off. In the case of our global credit business, a more methodical and holistic approach has proved more useful. The market was evolving at a much slower rate than elsewhere in fixed income, and frankly had essentially stagnated.
We knew we could make a real difference there if we focused on building a market for every trade – whether it’s fully electronic or electronically-processed. That opened up conversations with clients about all sorts of trading they do each day, and from that we’ve innovated and launched all of AiEX, streaming liquidity, multi-dealer netting, portfolio trading and sessions trading.
Clearly this approach is working: Our clients set another monthly record in U.S. credit trading, with ADV on Tradeweb in excess of $5.3bn in May, and this is now an area where there’s tremendous excitement about the future of trading.
4. Dealmaking: You’ve done a lot of deals over the years. Do you see dealmaking as essential to the success of any company, essential to the success of a trading platform in the complex and fragmented fixed-income space, essential to global expansion, or just one path among many to corporate success?
I like to break it down to the fundamentals: It’s about growth. Sometimes it’s a deal, or a JV, or investing in organic growth. Tradeweb has the flexibility to look at growth holistically – not every company is in that position. Dealmaking has clearly been one of the ways we’ve grown our business and going forward I expect that will continue. It is an important strategic option, and for a management team it can also be a great challenge and some fun.
For Tradeweb, flexibility has been a much bigger determinant of our corporate success than any sort of dogged commitment to either dealmaking or organic growth. If it makes sense, we’ll buy it, and if it doesn’t, we’ll build it. You have to be able to do both.
5. Market data: Market data has been all the rage of late. Are you looking to grow aggressively there, given your recent hire of ex-Citadel COO for data strategies and AI research Lisa Schirf as global head of data strategy?
There’s no doubt that how data is used to refine trading will help define the next decade of financial markets. Our clients are asking themselves how they use data to understand how they could trade better next time: better timing; better price; better counterparty; better execution method. We’re focused on optimizing data to help clients trade even more effectively.
Clearly, the trading community has begun to use algorithms and machine learning to optimize data, but widespread use in fixed income is really at an early stage. That’s the frontier we’re riding towards.
The good news is that our new team is building from a very solid foundation. We’ve operated award-winning TCA solutions for years running now; we’re the sole provider of closing prices for U.S. Treasuries and Gilts; and we see innovations like Ai-Price, which we currently use to predict prices for thousands of corporate bonds, as having numerous future use cases.
6. Portfolio trading: Tradeweb’s pioneering role in developing portfolio trading highlights the value of uncovering and automating manual client workflows. Are there other manual workflows in the fixed-income trading space crying out for automation?
I’m glad you mentioned portfolio trading. It’s a perfect case study of how centering our approach on what our clients need to do each day leads to innovations that change the way markets operate.
Since launch, we’ve facilitated more than $90B in portfolio trades globally, and interest has only increased since March volatility and a move to a work-from-home market. Portfolio trading allows you to move significant risk in a single transaction, with a single counterparty, and that execution certainty is something our customers really appreciate.
In fact, some of the most intellectually interesting work we do each day is working out how workflows could be better digitized. If you only focus on electronic execution, you’re missing out on a much broader evolution in the way risk is exchanged each day in every asset we trade. Whether it’s electronically hedging and processing voice trades in credit or multi-asset package interest rate swap trades, it’s something we’re laser-focused on across every team at Tradeweb.
7. Market structure: What are the biggest regulatory changes that need to happen in fixed income right now?
Broadly speaking, I would say there probably is a bit of regulatory fatigue at the moment, following a rather intense but necessary decade-plus of heightened global regulatory focus. Given that backdrop, in the near term, we would anticipate more targeted reforms, as opposed to massive overhauls.
Thoughtful regulation can make markets more efficient, more transparent and healthier. I think regulators around the world have generally done a good job addressing these goals, and certainly Tradeweb has focused a great deal of time and investment to uphold these same principles.
For our part, we have always believed that engagement between regulators and market participants is the best path towards designing and supporting healthy, functional markets. One of the great aspects of fixed income (and one of the regulatory challenges) is the variation in products/instruments, and the ways in which they trade. Dodd-Frank and MiFID II are a testament to this: massive in scope and dealing with a myriad of instruments and protocols. That means to get regulation right, it’s vital we think very precisely and practically about market microstructure for each product and marketplace, rather than applying a sweeping “one-size-fits-all” approach.
8. Electronification trends: How much of the surge in electronic trading in fixed income do you think is permanent, and how much do you attribute to investors seeking liquidity during a period of extreme volatility? What have Q2 trading trends on your platform indicated?
The long-term trend toward electronic markets was already well underway at the start of this year. In every market, region, and client segment we serve, the pace of electronification just continues to increase. In that respect, the intense volatility we saw in March, coupled with the longer tail of a work-from-home market has only really accelerated what was well underway.
Still, the peculiarities of this year — and especially a remote market — are fostering even more behavioral change. We’ve found our clients are particularly attuned to more electronic solutions as we’ve progressed through the year. For instance, despite waning volatility in April and May, our trading volumes were very robust which goes to show that behavior is changing. For example, on the last day of May, we accounted for more than 20% of TRACE of all high-grade corporate bond trades.
To go back to what I said at the start of this interview, I think as long as we’re useful today, and clients trust we’ll be additive in the future, we can continue to really progress.