Market Conditions Highlight Use Cases for Electronic Portfolio Trading
Managing Director, European Institutional Credit, Tradeweb
Recent market volatility, which began towards the end of February, coincided with increased usage of Tradeweb’s electronic portfolio trading protocol. Due to market conditions, more buyside customers have been motivated to explore new protocols as they were finding other protocols insufficient in meeting their needs at that time. Traders using standard list trading during the worst sell-off period in March, for example, were finding it difficult to achieve sufficient pricing and full execution. This article examines the array of use cases for portfolio trading, focusing on the two interconnected themes of liquidity and efficiency.
On the surface, a number of the use cases for portfolio and lists trades are identical, in that buyside customers work with both protocols to manage inflows and outflows, and perform rebalancings and rotations. The difference is, however, that a portfolio trade will be executed “all at once” with one dealer, whereas with a list trade each item can trade with any liquidity provider in the network. Also, the dealers that trade portfolio trades have dedicated traders that will price them as a package. This contingent pricing enables clients to get done precisely what they want to get done – all in one trade, sometimes by combining highly liquid items with less liquid items that might have gotten little attention in a standard list.
While the choice between list trading and portfolio trading should ultimately be made on a case-by-case basis, what are the circumstances when clients favour a portfolio trade versus a list trade?
There are a number of scenarios in which customers have preferred using portfolio trading:
- Certainty of full execution: We ran some analysis of European credit list trading activity on our platform in the second half of last year, and what we found was that half of standard lists leave line items unexecuted. So obviously when getting the entire package of bonds executed in full is a major objective, then an approach that is tailored to achieve this should be utilised. Many market makers typically price portfolios in full, and from what we've seen on our platform, about 95% of portfolios do get priced in full
- Time constrained: Customers sometimes need to trade as close to a specific timestamp as possible, or within a set timeframe. It may be that they are operating under an obligation to raise enough cash to meet an imminent outflow, or they may be obliged to invest an inflow before a specific cut-off time. This again is a scenario where portfolio trading is more appropriate than list trading
- Liquidity constrained: Portfolio trading works well when there is a need to trade a basket of bonds where some or even many of them are either less liquid or, indeed, totally illiquid. This is because it provides the ability to present these bonds in combination with other more liquid bonds
- Block trading: Customers also use portfolio trades when they have a series of block trades to execute. Because the notional size of each line item can run into tens of millions, discretion is paramount in these particular cases. Therefore the ability to target a tight circle of trusted market makers is key, and portfolio trading is a highly effective way to achieve that. The good news is that there are multiple dealers that have portfolio traders now. In the U.S. we have 13 dealers open for electronic portfolio trading on Tradeweb, and in Europe we currently have 10.
All protocols have a role to play
With portfolio trading, buyside participants are able to benefit from improved access to liquidity because they can put together a basket of bonds with varying liquidity profiles, send it out to dealers in competition, and receive prices back on every line item within minutes to a couple of hours. The ability to trade electronically also amounts to huge efficiency gains, not only in terms of the time saved, but in terms of market risk mitigation, operational risk reduction, and transaction cost optimisation. All of these add up to better overall execution quality.
An electronic solution for portfolio trading is a very useful addition in a market where a range of protocols all have a role to play. From fully automated execution to voice processing, single item trading to list trading, all-to-all trading to session-based trading, and now portfolio trading, we provide electronic solutions for every one of these protocols to help unlock liquidity and support trading strategies across the board for our clients.
To find out more about how Electronic Portfolio Trading is becoming a game changer for the credit market, you can watch our Webinar here.