Despite the rise of anonymous trading protocols in the U.S. corporate bond marketplace, relationship-based trading still commands a significant majority of trading activity – predominantly executed over the telephone. Institutional investors may still rely on established liquidity providers to move risk when they need help with large size or more illiquid trades, but this isn’t all that different from the plot arc of popular home renovation television shows.
Contractors gut fixer-upper homes to transform the living experience for homeowners, while embracing its character, structure, and unique specific elements. Electronic trading platforms are starting to take a similar approach in U.S. credit, seeking new ways to enhance relationships while transforming trade workflows with greater operational efficiency – becoming less reliant on phone calls and hand scribbled notes while moving to a process featuring greater efficiency.
Electronifying the relationship
Voice trades, long a staple of the credit market, are time consuming and create operational risks for the buy side, such as human error that can mix up buys vs. sells.
“After making calls for price discovery and negotiating, there are phone calls to go from accepting the spread on U.S. investment grade credit to final price,” says Chris Bruner, Head of U.S. Credit at Tradeweb. “You call a salesperson… they answer… then you agree… then they go figure out the hedges. There are calls to a bank treasury desk, return calls, pulling everything up on the screen. Let’s say that takes five minutes – even two minutes. If you’re doing that for hundreds of trades it can be really cumbersome.”
Bruner is a key player at Tradeweb, a company that is helping to lead the transformation of the way the fixed income market does business by designing workflow and market structure for over-the-counter marketplaces. To build better markets, Bruner and his colleagues have realized it’s vital to help participants have the best of both worlds by enhancing their relationships while providing electronic efficiencies.
“Relationships remain very important in the credit market,” says Bruner. “People want to keep them in play, either from an information perspective or for the value of the relationship in providing trade ideas and color.”
As Bruner notes, however, there’s no need to force all trades into a fully electronic workflow, but rather to determine how technology can fit in with the needs and comfort levels of the buy and sell sides.
“Clients are really interested in leveraging relationships when they’re executing blocks,” says Bruner. “A lot of the securities issued aren’t yet ready to move to electronic. But if you move them off of pen and paper and onto an electronic order workflow, then we can begin to electronify the relationship, which provides the buy side with an audit trail to reduce their operational risk and make workflows more efficient.”
Relative to other markets, the need to access a wide range of less liquid securities, and in large blocks, is a good window into why trust and relationships still matter in the corporate bond market.
“If you’re moving a large size block of a reasonably small or even medium size issue, you don't necessarily want the world to know that you’re trying to buy 5 percent of the outstanding issue,” says Bruner. “That’s a very typical thing to do in our marketplace if you’re a large institutional client. Participants want to get the balance right of how broadly they communicate what they’re trying to do. If you go too broadly, then everyone knows about it, and that can influence the ability to accomplish your goals.”
Optimizing the workflow
Integrating process innovation pre- and post-trade, Tradeweb has layered significantly more operational efficiency on top of its unique network. Traders can still leverage their relationships over the phone to trade, but also supercharge the processing of that trade by entering it on to Tradeweb.
The key differentiator on Tradeweb came with the introduction of automated price spotting, however, which seamlessly connects to Tradeweb’s leading U.S. Treasury marketplace. This can dramatically reduce the time necessary to spot trades, while also reducing the risks of human error. By enhancing traders’ existing workflow, Tradeweb’s electronic voice processing volume grew to $195 billion in 2017, more than doubling from $81 billion in 2016.
Tradeweb has also taken a step further in offering post-trade benefits of processing these trades electronically by enabling multi-dealer netting of all offsetting Treasury hedges in the spotting process. This means that investors can save bid offer on all those spots by consolidating their voice and electronic trades to price and execute baskets of exposure in a list for larger parts of the entirety of their funds, calculate the net hedge, and offset interest rate risk in as little as one trade.
After just six months, almost 10 percent of voice-processed volumes on Tradeweb are now being executed with Multi-dealer Net Spotting. For a client executing $100 billion of risk, this could easily mean savings upwards of $3.7 million if only 20 percent of that flow is netted, according to Bruner.