Viewpoint : Nichola Hunter: The next big evolution in rates trading

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Q&A with Nichola Hunter at MarketAxess.

What were the drivers behind the MarketAxess expansion into rates?
There were two main drivers. One was to provide, primarily through the acquisition of LiquidityEdge, a deep and ready-made liquidity pool of US treasuries for credit hedging. Being the largest electronic market for credit, there was a good deal of volume going through MarketAxess that needed to be hedged against US Treasuries (USTs). So, the intent was to capture that activity, instead of seeing it flipped to the phone or elsewhere.
The second was simply the desire to become a more full-service, fixed income trading platform, and to address the combined rates and credit trading needs of the whole MarketAxess client base. We saw a range of great opportunities to improve the choice of trading protocols for our existing clients – the immediate priority being to expose highly competitive, firm, executable streaming treasury liquidity via the MarketAxess GUI.

What have been the major deliverables so far?
We have been extremely busy since the acquisition with both integration projects and launching the new hedging workflows. The two most important deliverables to date are our auto-hedging and net hedging solutions, and the click-to-trade treasury integration.
Auto-hedging was launched in Q1 last year, giving MarketAxess dealers the ability to execute the treasury hedge in one seamless workflow. Click-to-trade integration also went live in 2020, enabling all clients of MarketAxess who trade US treasuries to execute directly from the MarketAxess workstation.

These are major milestones achieved so far – but we won’t be stopping there. We have a high ambition level and are continually looking for ways to support our clients and dealers by making US treasuries more efficient and cost-effective to trade. I won’t give too much away, but with this in mind we are coming to market with new product built around the RFQ protocol later this year.

What are the tangible benefits to clients?
Well, as you know, as a firm our delivery promise is always for cost savings and execution efficiency and that’s no different here. By giving clients and dealers a single, integrated trading platform for credit and rates, and to bring our unique liquidity and trading protocols to bear on that combined flow, we’re making good on that promise.

There are just so many use cases and opportunities in credit trading for hedging outlets into treasuries; it’s so exciting. For example, we’re already looking at the opportunities that we can create with Live Markets, a live central limit order book for credit. And we know that there are also opportunities in the municipal bond space, where once again we’re leading the charge for electronification and innovation. And the opportunities extend well beyond treasuries and into European government bonds, a focus for us in the coming months.

What’s the impact of your process integration for sell-side dealers?
There’s tremendous upside here for our dealers in terms of workflow efficiency.

Any dealer with a credit and rates franchise will want to capture the credit trade and hedge with USTs internally. The asset manager trades directly with the credit desk and then the credit desk will manage the hedge with the rates desk. What we’re doing is streamlining and automating that process.

MarketAxess has an innovative solution because we can facilitate the internalisation of that trade for our dealers. We will offer a choice: either a dealer can have MarketAxess take down the US Treasury leg, or for dealers who have their own rates franchise their client can trade credit with the dealer bilaterally on MarketAxess. Then, using our pipes, we facilitate the internalisation of the treasury between the credit desk and the rates desk for that dealer.

We are creating workflow efficiency for the dealer, so they keep the entire trade and price it accordingly, without a manual step to do the hedge. And for dealers who do not have rates desks, they have the option to hedge that into our ready-made liquidity pool that we have available for them.

Are there plans for European expansion?
Absolutely! We see this as a key opportunity for us, because of the quality of our data and the size of our client and dealer network.

The European rates market is a different beast to the US. It’s much more fragmented, with micro-markets for each country, so its evolutionary status is different. That means that our focus initially, rather than streaming as with US treasuries, is on RFQ for European government bonds (EGBs).

What makes our approach unique, and really exciting, is the new EGB version of CP+ that we’ve just launched. What we’ve done is taken an award-winning, pre-trade price discovery engine for credit, and spent months analysing and curating our data to develop the same for EGBs.

It’s truly ground-breaking – there is nothing like this currently available, because no-one else has the depth of EGB data that we do. We estimate that, through our Trax data, we’re able to see about 75% or more of the EGB transactions in Europe. So, we’re able to plug that into the CP+ AI and build a composite price with an incredible degree of accuracy.
We believe that predictive pricing capability will be a big draw for clients, and we’re looking forward to engaging with them on it in the coming months.

We’ll continue to be innovative on top of this as we expand the dealer and client network, in particular at the less liquid end of the spectrum, as we’re doing in treasuries.

Beyond cash markets what is the potential for derivatives trading? And what comes next in your ambitions?
When we talk about rates, the cash markets are just the tip of the iceberg. That said, we still have a lot to do and have a long list of product innovation that we are planning to bring to market, which will keep us busy in the short term. Market structure evolves one step at a time, and where it makes sense for our business trajectory, we will of course look at possible strategic acquisitions or look to bolt on other instrument classes where it makes sense.

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