The use of ‘axes’ that dealers provide to buy-side clients, giving an indication of the price at which they will trade at a given size, proved controversial on a panel at the FIX EMEA Trading Conference in London.
Just under half of the audience called it “an indication of interest to trade that is provided by a dealer” in a straw poll, but around 39% labelled axes as “a position that is held by a dealer in which they want to advertise to clients”.
Only 13% defined an axe as “a firm price”.
The importance of this definition is the extent to which axes can be trusted by buy-side traders. If banks will stand behind the price and size at which they are axed, their clients can use them reliably. If axe prices or sizes are too far away from where a bank will really trade, this undermines axe use, and undermines relationships.
“Axes are the number one standout, the biggest driver of whether we’re going to get good
execution,” stated Sam Knight, director of global e-trading at Fidelity. “I say they’re a positive – keep showing them.”
“Axes are still categorically the best dealer selection tool out of anything else that is available in the market,” added a speaker from an electronic trading platform.
However, Schroders’ head of European credit trading, Ricardo Goddard, said that he relied less on axes than on existing dealer relationships to decide where to trade.
“Credit markets are balance sheet driven – we rely on market makers. Relationships between the buy- and sell-side desks are more important than an axe flag on dozens of ISINs when trading blocks. The proliferation of axes designed to capture small e-enquiries can be unhelpful. This should be baked into the price.
“An axe can be irrelevant in smaller sized trades. I don’t particularly care if I trade with s
omeone who’s axed or not,” he stated. “I prefer to trade between parties who are both happy at the point of trade. If there was no axe or several, I would decide who to trade with based on performance versus streaming price. Having this data at point of trade, real-time, can make a huge difference.”
The risk of undermining axe use is being driven by the ‘gamification’ of dealer selection, one sell-side trader said, with market makers submitting as many axes as possible so as to grab orders with little regard for the quality of their submissions.
One speaker said that dealers are supported in this activity by two dynamics.
“The first argument is behavioural. It’s the idea that dealers will put as many axes out there as possible in large volumes, in small quantities, and they do this in order to maximise enquiry rates. The second argument is structural. It’s the idea that platforms will facilitate this kind of behaviour and create certain reverse incentives for dealers to behave this way,” they explained.
Yet the buy-side are dis-incentivised to use axes, precisely as a result of this activity, argued Eric Boess, global head of trading at Allianz Global Investors.
“If you’re churning out meaningless markets, streams and axes, it’s probably not going to
convince me to come to your shop,” he said. “We all hate it. We’re trying to cut through this,” he said.
Both buy-side firms and trading venues could fight back against axe misuse, the panel said.
“I would love for clients to pressure their platforms to deliver that axe quality score for them,” one speaker added.
Knight observed that there are already tools in place to deal with exuberant dealers. “If they are flooding axes, you can do clever screening now. We do that away from the venues.”
Last year, ICMA and the FIX Trading Community released a white paper examining how axes were faring in an electronic market – and found them lacking.
READ MORE: Bond market axes struggle in electronified markets, ICMA finds
What panel speakers could agree on is that actually having a clear, shared understanding of what an axe is would be a good place to start.
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