How can traders build out their multi-asset trading capabilities?
For buy-side firms to increase low-touch execution capabilities across instruments,new trading protocols are needed. The DESK spoke with Bhas Nalabothula, head of European Interest Rate Derivatives at Tradeweb, about the approaches that asset managers can take in order to advance their multi-asset trading.
How do you see multi-asset trading developing amongst your buy-side clients?
We’re seeing multi-asset trading desks getting leaner. The capacity to automate some of their flow is growing. That might mean automating the hedge or the foreign exchange leg of a trade, or it can represent a low-touch approach to handling smaller trades across assets.
At the same time, there is much greater focus on workflow efficiency and best execution, which now goes beyond price improvement and has to be evidenced. Consequently, traders have increased oversight of their performance and greater administrative activity; they need to reduce their workload and improve their effectiveness.
Across the board, portfolio-style trading is taking off. In credit we recently expanded our portfolio trading capability to European bonds, and in swaps we now facilitate multi-asset package (MAP) trading for sterling interest rate derivatives and bonds. Both solutions are key to supporting the execution of more complicated transactions with the benefit of netting different instruments together.
How do you see the high-touch and low-touch trading protocols typically mapping across different instruments today?
The execution of high-touch or larger size transactions in different assets depends on how the client wants to interact with the marketplace. The larger the trade, irrespective of asset class, the more likely it would be negotiated directly with a sales person. Large block risk transfers are the highest of high-touch, and we facilitate those transactions via both the trading protocols and the price range that we offer on the platform.
In swaps, clients are willing to execute these large risk transfers on Tradeweb because we have protocols, such as request-for-market, that help prevent information leakage by allowing them not to disclose the direction that they want to trade.
Additionally, our Automated Intelligent Execution (AiEX) functionality helps the buy-side to automate trades via rules and data that they set up across multiple different types of transactions on the platform. For cash bonds, AiEX represents a significant proportion of our overall flow, partly because of the sheer volume of transactions we see in the space. As desks look to gain workflow efficiencies, the opportunities to automate derivatives are also gaining much more attention. Clients are increasingly looking at the tool as an option to increase speed-to-market, and reduce both costs and operational risk.
What sort of help are firms looking for in terms of optimising their trading models today?
We’re unique among electronic venues in that we offer marketplaces for rates, credit, equities and money markets. As a result, we work with different types of firms; asset managers, central banks, systematic hedge funds and macro hedge funds. They all have specific requirements, so our toolkit for them is pretty extensive. Educating clients on the nuances of what we offer in a solution like AiEX, for example, is phase one of how we work with them. Then we discuss the more unique parameters or tools that they want implemented, and if it’s something that we think we can bring to the market for other asset classes and clients, we would look to do that.
Collaborative innovation has been behind the development of such diverse and flexible functionality across the platform. Our MAP tool went live last quarter and we already have 12 dealers supporting it. We launch protocols like this with first-mover clients, who drive execution electronically for workflow efficiencies and the price transparency that they provide them. Once that liquidity is up and running, these protocols can be scaled to the rest of the buy- and sell-side, so they can also take advantage of the benefits they offer.
How will automation feature in multi-asset trading going forward?
It’s going to continually rise, although the actual growth rate is hard to predict. Automation in FX and equities is very advanced, and is now picking up pace in rates and credit. On the rates side, we’ve long seen automated pricing from market makers and are now witnessing increasingly more auto-responding and auto-hedging.
Tradeweb introduced AiEX in 2012, but as more clients use it, they come to us with feedback around automating different pieces of their workflow. Getting the technology in place to enable automation takes very little time and effort thanks to our connectivity to the different buy-side systems, which has reduced barriers to entry significantly. With so many firms already integrated with us via FIX, it’s really easy to roll out any new functionality that we develop.
Do you see manual elements of the high-touch workflow being automated?
Being a bit more technical around dealer selection is something that we see not only in credit, but across different instruments. Our dealer selection tools are constantly getting smarter and can now help clients identify the top performing counterparties based on live axes or streaming prices, and historical platform-wide trading data.
Can the value of automation and enhanced trading protocols be qualified or quantified?
Transaction cost analysis is key to understanding any impact on trading, and our TCA tool helps our customers better understand where they can improve their performance and configure their AiEX parameters accordingly. In addition, our integration with leading margin optimisation providers, Cassini Systems and OpenGamma, offers clients access to life-cycle cost analytics, supporting multi-asset trading.
Ultimately, automation increases the amount of trades that can be done with minimal intervention, clearly saving on a trader’s time. The initial benefit is the straight-through processing of the trade itself.
If you trade let’s say 150 interest rate swaps and book that manually, it can take hours to complete with a much higher likelihood of an operational issue. List trading of portfolios means the operational risk is dramatically reduced.
How are you working to better support your clients in engaging in more efficient multi-asset trading?
As we increase the scope of products and currencies we trade on our platform, we constantly look to collaborate and innovate with our clients. We work very closely with our network of buy- and sell-side institutions on how they can improve their execution. That is evidenced by the launch of the many new trading protocols and workflow solutions in the last few months.
Right now, we see emerging markets capabilities developing in the swaps space. Large asset managers that are fully integrated into Tradeweb are using the same infrastructure to trade swaps in the market, working with us to further enhance their access to liquidity from these emerging markets currencies.
It all comes back to improving the search for liquidity, streamlining the execution process, and supporting the evidencing of execution quality to boost multi-asset capabilities and enhance traders’ workflow.
©The DESK 2020