Portfolio Trading: An Innovative Solution for Corporate Bond Trading
Iseult E.A. Conlin, CFA
Managing Director, U.S. Cash Credit, Tradeweb
The Tradeweb strategy in every asset class and region in which we operate is to build a robust and resilient market that connects every client to deep liquidity. This is particularly obvious in corporate bond trading, where our rising market share speaks to our ability to connect clients in an entirely unique way. Among the drivers of that progress has been our development of Portfolio Trading for corporate bonds, which launched at the start of 2019.
A Changing Market
Though portfolio trading has existed in equities for many years, it is relatively new to the corporate bond market, where the digitization of larger-size “block” trades has been persistently slow. According to Greenwich Associates, in July 2019 only 30% of the US investment grade credit market was traded electronically. But while those headline numbers suggest a market in stasis, the reality is very different.
This is due, in part, to transformation on the peripheries of corporate bond cash markets. The recent growth of fixed income ETF assets – which, according to reporting by the Wall Street Journal, now exceed $1 trillion under management – has prompted significant increases in daily volume across line items to spur the create and redeem process. This has also been aided by the entrance of non-traditional market-makers and the maturation of all-to-all trading, which has included the blending of traditionally separate liquidity silos such as the dealer-to-dealer or retail markets.
In response, market-makers have sharpened their capabilities: there are now numerous dealers and liquidity providers that can algorithmically price thousands of bonds in real-time.
But ETFs are only one part of the puzzle. Institutional traders themselves want to trade at size, and across line items: inflows and outflows; the changing view of credit research analysts; or transition management could all prompt a situation in which significant trading flow needs to be moved quickly and efficiently.
How then, can you service this demand for complex block trading and speedy risk transfer? To Tradeweb, one answer is portfolio trading.
Portfolio Trading at Tradeweb
Portfolio trading at Tradeweb improves execution efficiency by allowing institutions to package multiple bonds into a single basket, negotiate a portfolio level price with liquidity providers including banks and principal trading firms, and execute in a single transaction.
There are plenty of reasons to try it:
- Efficiency and timeliness: It’s inefficient to trade each ISIN one by one. It would take considerable time to go through each individual trade and find the right counterparty manually over the phone
- Price impact: Large trades can be market-moving, so while utilizing a list RFQ protocol to trade many bonds at once may be efficient, prices could be impacted
- Designated portfolio trader: Trading with an individual portfolio trader at a bank can minimize information leakage. Designated portfolio traders are versed in the Fixed Income ETF ecosystem and can leverage the create-redeem processes to smartly price baskets of risk. This has been common in the U.S., and is becoming more common in Europe
- Aggregate pricing: The ability to view aggregate basket portfolio-level statistics and pricing for the trade in its entirety (vs. pricing every ISIN) can be used for BestEx and Transaction Cost Analysis (TCA) purposes
- Illiquid securities: For bonds that are so illiquid that unless structured as a package trade where risk can be mitigated across more liquid bonds, there is no way a bank can price the illiquid bonds
Although it’s only in its infancy, electronic portfolio trading has the potential to span assets and currencies. In time, portfolio trading specialists at banks could price corporate bonds, government bonds, ETFs and derivative products all in one package trade. Moreover, banks could advertise their existing balance sheet to cross-asset portfolio specialists on the buy-side, as a means to manage inventory and transfer risk.
But solving for portfolio trading is only one part of our strategy. If, per Greenwich Associates, there’s 70% of the market that is still not traded electronically, that means there’s 70% of the market where innovative protocols and tools might help ease daily trading, speed risk transfer, and optimize balance sheets. Our electronic evolution is just getting started...