Group Co.
Bond Algos Tap into ETF Liquidity and Efficiency Gains
Traders Magazine Online News, March 11, 2019
Algorithmic trading has picked up steam in the corporate bond market as fixed income trading desks appear to follow the playbook of equities. But skeptics contend this is unlikely, arguing that bonds are quite different and will undergo their own electronic transformation.
One of the world’s largest fund managers has developed a pre-programmed system that executes buy-and sell orders with minimal handling by its traders, according to a speaker at Tabb Group’s “Survival of the Fittest” fixed income conference in February.
With a goal of “zero to low-touch trading” the asset manager follows pre-set rules and instructions to execute each order.
Corporate bond algos allow the buy side to respond to thousands of prices –request for quotes (RFQs)– sent by the brokers and then automatically execute on certain parameters.
“Right now, the way it works is to have a set of bots that are set up to deploy and scan large RFQs from the dealers in the market and automatically respond to RFQs,” said the buy-side speaker on “Bond Algos – Equities Redux or Can Liquidity be Manufactured.”
Efficiency gains and the search for opportunistic liquidity sources are driving adoption on buy-side fixed-income desks.
Banks have pulled back from responding manually to quote requests.
Some bank desks reportedly get thousands of requests for quotes per day. Brokers can cut costs by pricing bonds through an algo and the buy side can trade debt more efficiently.
However, on the credit side, liquidity is still challenging and the trades that are executed automatically are retail size or odd lots.
Whether there’s enough liquidity on the credit side for these algos to work is the question, said Larry Tabb, founder and chairman of Tabb Group, who moderated the panel.
Only 20% of corporate bonds are traded electronically partly owing to the complexity and numbers of bonds. Unlike in equities where each company has one common stock, each issuer may have many bonds with different maturities, yields and characteristics. Despite these obstacles, significant progress has been made for odd lots – trades less than $1 million.
“We are in the early stages of algorithmic trading,” said the buy-side trading technology executive whose firm is emphasizing efficiency, technology and innovation
“We set up an algo to automatically respond to RFQs with certain parameters, such as which part of the curve do you like, which bonds do you prefer, which bonds are attractive, which names are very active by our investment management teams,” said the buy-side executive.
“This basically allows those algos to run and source opportunistic liquidity for our investment portfolios,” said the buy-side speaker.
Internally, the asset manager has developed a user interface that allows everyone on the investment team to access the list of parameters and modify them so it’s transparent.
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