How to Scale Up EM Trading Efficiently
Tannia Munroe talks to TraderTV about how Investment Managers are handling the increased demands
Thus far in 2021, the investor thirst for emerging market (EM) assets has been insatiable, and for good reason. With U.S. Treasury yields persistently hovering around the 1.3% mark and roughly 60% of euro-denominated government bonds still in negative yield territory, emerging markets represent one of the last bastions of yield.
The iShares JP Morgan USD Emerging Market Bond exchange traded fund, for example, yielded around 3.85% as of July 11. According to Lipper, it also brought in nearly $430 million in new assets that week. But with this EM boom comes an increasing pressure on investment managers to scale up their emerging markets trading operations to cope with increasing demand.
Tradeweb’s Tannia Munroe, Emerging Markets Product Manager, recently sat down with Dan Barnes at TraderTV to discuss exactly how investment managers are handling that transition.
Dan Barnes: If an Investment Manager wants to scale up their EM trading operations today, what are the potential barriers to that?
Tannia Munroe: I think the first thing that I would say is obviously it’s a very global product in nature. You’ve got over 80 countries available to you; different geopolitical environments, different economic environments. Things like infrastructure in different countries matter in the financial markets. So all of these are things that you should be looking at and kind of gauging in terms of what your risk appetite is for those. Additionally, you really do need specific knowledge in terms of things like capital flow restrictions.
So if perhaps I want to invest in Brazil or Indonesia, are there restrictions in terms of what percentage of my investment I can have in those countries? Do I have to invest in local currency, or can I invest in hard currency? Is it an ID market? Do I need some sort of registration beforehand? Trade barriers are also something that people really need to consider. For the last couple of years, we’ve been really focused on China. Not just in terms of offering something like Bond Connect, but also just making sure that we are handling sanctions appropriately and that our clients understand what they are and that the platform is doing everything it can to be compliant. We want to make it as seamless for clients to comply with regulation and market structure reform as possible.
Dan Barnes: If somebody is scaling up in EM, they might be starting with a completely blank slate. What are some good first steps for them to take?
Tannia Munroe: I think it’s not really a blank slate. I do think that there are already tools there for clients that want to get into emerging markets. Really from an efficiency perspective, you can look at the systems that you’re already using and what protocols exist already for other products that might be related. If you trade interest rate swaps or if you trade investment grade credit, where do you have pre-existing connectivity? You’re going to first make a determination in terms of what countries do you want to be in, what types of instruments you want to invest in.
A platform like Tradeweb gives you a lot of opportunity from that perspective; we cover at least 5 different asset classes within EM. We’ve got hard and local currency bonds, we have emerging markets CDS, single-name sovereigns, a China bond product. We have interest-rate derivatives on the EM side as well, so there is lots of choice there. You want to look at market share as well. And I’ll say that volumes are not the only story to tell there. You want to see which platforms obviously have the highest volume, but also which have the highest growth. That’s a great indicator. Emerging Markets Swaps is a new product for us; we’ve done over 420 billion* dollars year-to-date. What’s really impressive is the growth there.
*as of June 2020
Dan Barnes: And how mature are markets in the sense of adopting platforms for trading?
Tannia Munroe: I think the quick answer is more mature than many people think. Both the sell side and the buy side have become much more comfortable with EM markets in general. All of our protocols support the commingling of global products. We’ve got local currency instruments, both on the cash and derivatives side, that are very well supported both by the dealer community but also very compelling and being used by clients. As you know, the world continues to get more global in nature and EM is no different. After the pandemic, we really needed to embrace technology in a way we hadn’t before and that became evident in the world of EM. Platforms became much more commonplace, no longer something to be wary of, but rather something that folks embraced and knew could help them, and not just something for the largest clients. We’ve got a lot of new clients coming into the EM space that are smaller, that are not the traditional very large asset managers or hedge funds.
Dan Barnes: So then what does that adoption of platforms look like potentially to a trader?
Tannia Munroe: To give you one example, we’ve rolled out portfolio trading into EM, and that’s basically a protocol that allows you to trade a basket of global bonds with varying degrees of liquidity and diverse risk profiles in one single transaction. Anyone that’s heard me talk about portfolio trading before has heard me talk about the benefits of getting STP, straight-through processing, and it being an efficiency tool.
However, one of the things that’s most relevant and important about portfolio trading is really that it gives you certainty of execution. It also gives you the potential for more attractive bid-offer spreads. In EM, it gives you the ability to prove best execution in the same way that your colleagues in the developed markets can. We have a very robust transaction cost analysis tool that our clients are using and we’ve gotten great feedback on that.
Additionally, we’ve got more data transparency tools for traders. Things like composites for EM IRS that weren’t available before. In the cash credit space, we’ve got our Ai-Price which is really our benchmark composite price. We have a new liquidity score that gives you the ability to really determine. Okay, how liquid is this particular bond? We have a liquidity score for over 7,100 EM bonds on the platform now.
Dan Barnes: That portfolio trading aspect’s very interesting, so potentially somebody could be taking bonds from Asia Pacific and from Latin America, and trading them in a single portfolio with pre-trade transparency from the data feed?
Tannia Munroe: That’s absolutely correct, and in fact, we see many PTs that way. Before I sat down to do this interview with you, we had a portfolio that was very global, all EM regions included, and was multi-currency, and it got executed seamlessly. And it’s efficient for both sides. It’s efficient for the client, but it’s also efficient for the dealer. A client goes into a portfolio trade expecting the entire basket to trade, a dealer goes into pricing a portfolio trade understanding the full risk profile of the portfolio and with the understanding that it’s going to trade in its entirety as well, and it works out well for both sides.
Dan Barnes: And then with interest rate swaps, what exactly would having that pre-trade composite do for them?
Tannia Munroe: I think having that pre-trade transparency gives traders the comfort of knowing what sorts of levels they can expect. It’s hard to know sometimes in these EM markets what is a good level. So having a composite can give you some indication. Additionally, for a dealer, you can use that as a benchmark on your own end. How does your pricing compare to the composite level? And I think it’s something that is available in most developed markets already, and something that clients are used to seeing, and so they’re all very happy to hear that we’ve got them for emerging markets now as well.
Dan Barnes: The biggest pressure typically on traders is always time, and of course if you’re trying to trade across 80 different markets, having all that knowledge is a big issue for a trader in terms of skills, then they’ve got the time pressure of managing trading across those markets. I can really see portfolio trading and some of this pre-trade transparency creating massive efficiencies on the desk.
Tannia Munroe: Exactly, it’s all about efficiency; it’s about being able to do more in less amount of time, but also it’s about having tools that allow you to get better execution, because at the end of the day if I help you trade faster but you don’t get a better level, that’s not great. You need both of those things.
Dan Barnes: What advice would you give to heads of trading who are just starting out on this journey?
Tannia Munroe: I would say speak to your partners at the sell side; other firms, but also on the platforms, and try to understand what capabilities can either be ported across to this market, what you can use that is already there, so that you don’t necessarily have to increase headcount to get into EM, and you know which platforms and which systems the market is most comfortable using.
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