Fixed income markets have long relied on relationship-based trading to provide investors with flexibility in the ways they access liquidity. The arrival of request-for-quote (RFQ) platforms helped digitize phone trading over the last 15 to 20 years, but with an established network and greater access to more data, traders are beginning to leverage the next generation of trading technology for greater automation.
Access to deeper levels of trade data and market intelligence captured by electronic trading are helping buy-side firms identify automation opportunities using technology such as Tradeweb’s new Automated Intelligent Execution, or AiEX. What started as a way of automating low-touch trades in on-the-run U.S. Treasuries is helping reduce operational and execution risk, freeing up trading desks across fixed income to focus on higher touch business and strategy.
AiEX empowers traders with rules-based, data-driven logic to systematically send, receive, execute, and process trades. It’s a detailed process to map the decision tree that automates trade execution, but Tradeweb has made it possible by integrating its market intelligence with client-directed factors.
“As we continue to see a shift toward smaller trades and desks focused on low-touch and more passive, ETF-driven business, traders need to do more with less. Automation with AiEX can play an increasingly important role for those trades,” says Colm Murtagh, Head of U.S. Institutional Rates at Tradeweb. “People will have to hone skills in a particular sector, and that sector could be in automated trading, such as AiEX, as opposed to a corporate sector or a rates sector. If they understand how to apply parameters effectively across one asset, they can use it across many assets. And that gives them tremendous leverage at scale to enhance their low-touch trading, which is now an expense for many organizations, and separated from traditional portfolio management so that it’s part of the cost of running an investment. This is by far the easiest way to reduce the costs of that approach.”
These benefits extend beyond more standardized markets like Treasuries, including the adaptation of AiEX to some of the unique aspects of corporate bonds. “Credit has a very diverse set of instruments,” says Chris Bruner, Head of U.S. Credit at Tradeweb. “Some are quite liquid. Not as liquid as underlying treasuries – but quite liquid, like Apple paper, for example. We’re working with clients to figure out the most appropriate way to leverage AiEX.”
Efficiencies related to AiEX also manifest themselves differently in credit. There may be an even larger benefit of time for any particular given trade. “There’s now a rules-based way to get faster execution on a list of corporate bonds in a minute or two. On any given set of trades, you might be saving a human 30 minutes. We see this potentially leapfrogging the existing electronic execution for the more liquid space within credit.”
All of this advancement is the result of rules-based parameters, leveraging data to help Tradeweb clients navigate the market and execute automatically. The parameters for corporate credit, for example, draw on the basics that are customized for each client in Treasuries – trade size, tenors to focus on (should there be different rules for two-year, five-year, etc.), how many liquidity providers to put in competition, and more.
AiEX for corporate credit adds several factors to customize the process, such as longer windows of time to execute a trade. Additional inputs are also in their early days according to Bruner, such as liquidity scores Tradeweb generates from TRACE and other trading activity in the marketplace to aid in selecting the right protocol to execute a trade.
“That’s very important for credit,” he says. “Clients say, ‘I don’t want to think as much about what I send you, so I’ll send you the list of bonds I would like to have.’ But we might have a filter that says only send the more liquid bonds to market via AiEX. If it doesn’t meet that criteria, it gets passed back to the trader without delay.”
Customization and scale
Amid early growth, increased adoption of AiEX depends on identifying the wants and needs of individual businesses. “We work with clients to create parameters and rules that reflect how they do business today, and how they want to do business tomorrow,” says Murtagh. “That’s the key – you don’t want to build something that they feel hinders them. You want to enhance their current process, and improve the way that they work with the Street. When they realize they need to change their parameters, they can work with us to do that. We can go through whatever data they need to help determine their quantitative approach and combine it with their qualitative expertise and experience to understand what needs to be reflected in the automation.”
“At the end of the day,” he adds, “if you’re able to determine the parameters within which you want to trade, AiEX should be able to do it for you in a more efficient way that reduces risk, adds value to portfolios, and ultimately frees up time of skilled traders to focus on bigger trades that add even more value to portfolios.”