Portfolio trade or RFQ? This is the dilemma buyside credit desks face when trading lists of bonds. Credit platforms are trying to help.
Request-for-quote (RFQ), the long-term default trading protocol in fixed income, is having to evolve to keep up with innovative solutions. At FILS Europe, panellists argued that RFQ distorts pricing and emphasised the importance of choosing the correct protocol for each asset class, market structure and macro environment.
READ MORE: “RFQs will be obsolete”, traders predicthttps://www.fi-desk.com/tradeweb-acquires-trumid-narrows-competitive-landscape/
As the landscape shifts, trading platforms are developing services to help traders decide which protocol route to take.
The most recent launch is Trumid’s List Optimizer, a decision engine designed to support bond list protocol allocations. Using proprietary pre-trade analytics tools, the tool provides bond-level allocation suggestions between Trumid’s PT and RFQ protocols based on expected execution outcomes.
“Since the beginning of PT people have wanted to know how they can split their list trades between PT and RFQ,” Paris Pender, head of portfolio and macro credit trading, told The DESK.
“RFQ used to be the only option for doing lists, and it seemed very sensible. You send out a list, you get quotes back on every bond, you choose the best quote, and you’re all done. When PT came along, suddenly you had to compare. Is line by line or all or none better? How do I account for the holistic effects that come with PT pricing? How do I weigh them against single names? It’s a very hard problem.”
On List Optimizer, traders receive suggestions on whether they should send mixed lists of buys and sells as a single combined PT or separate bids/offers wanted in competition (B/OWIC). These suggestions can then be taken directly into operations.
Rival MarketAxess provides pre-trade data and analytics tools that can help support protocol selection choices, identifying outlier bonds within portfolios and determining where expected costs are concentrated. These services are primarily used to analyse, construct and optimise portfolios before they reach the market.
Tradeweb, which announced its upcoming acquisition of Trumid last month, offers list trading services across asset classes.
READ MORE: Tradeweb acquires Trumid, narrows competitive landscape
“This is easily the heaviest computation we have on the platform. If you wanted to brute force this, and you had a list of 1000 bonds, there would be 10 to the power of 300 options. There’s not enough compute power on the planet to crunch that quickly enough,” Pender added.
Trumid has been rolling out new trading protocols and solutions at pace, releasing a cross-protocol execution automation service earlier this year.
READ MORE: Trumid launches cross-protocol execution automation
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