WBR survey: Buy-side pushed towards price-making and ETF use


By Pia Hecher.

Following the introduction of the new Markets in Financial Instruments Directive (MiFID II), which has formalised best execution reporting, two-thirds of heads of fixed income at buy-side firms changed their best execution process, while nearly a third (29%) expanded the number of counterparties they trade with by more than 50%, according to a report published by Worldwide Business Research (WBR).

The report, sponsored by Jane Street, surveyed 100 heads of fixed income and chief investment officers (CIOs) from European buy-side firms in Q2 of 2018.

“Greater focus on best execution and increased price transparency has caused buy-side traders to seek new sources of liquidity,” said Slawomir Rzeszotko, head of Institutional Sales & Trading for Jane Street.

Two thirds of heads of fixed income reported that they want to partner with at least three new bond -trading platforms in the coming year. The ease of integration was rated as a platform’s most desirable quality.

“Buy-side desks are having to become more pro-active in their search for technology partners. At one level this is about an arms race for liquidity and survival,” Carl James, global head of Fixed Income Trading for Pictet Asset Management, explained.

More than two thirds of those surveyed are reporting trade via an approved publication arrangement (APA). While the majority said they have a pre-trade pricing model on their desktop, not all were satisfied with the quality of tools: “When a good pre-trade tool arrives, it will be a must have for all traders… we are still waiting,” one head of trading at Tier 1 Asset Management stated.

Seventy per cent confirmed they had previously made a price and/or supplied liquidity to the market, 66% considered prices most significant when it came to best execution for liquid fixed income instruments, while 45% rated the likelihood of execution and settlement as most important when asked about illiquid fixed income instruments.

CIOs reported the use of exchange traded funds (ETFs) were gaining in popularity amongst institutional investors, with nearly 50% noting an increased interest in ETFs following the implementation of MiFID II.

Respondents described trading volume and spreads as most significant when assessing new ETFs. Most CIOs considered smart beta or factor exposure the most attractive ETF strategy, and a lack of flexibility was cited as the main reason not to invest in bond ETF instruments.

“It will always be a challenge for fixed income ETFs to match the level of adoption that their equity siblings due to their lack of flexibility,” Stephen Doran, senior fund manager at HSBC Global Asset Management, explained.

Twenty nine percent said they invest over 31% of their current assets under management (AUM) in fixed income ETFs. “This tells me that investors are getting to know ETFs beyond the broad exposures and applying them for more granular asset allocation,” said Brett Olson, managing director at BlackRock.

Most CIOs claimed they hold at least six ETFs in their portfolio, while 63% anticipated the use of ETFs to proliferate over the next year.

“Increased transparency of ETF trading volumes under MiFID is helping many investors become comfortable that the industry is big and liquid enough to be an efficient way to invest,” said Olsen.

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