A new era of credit portfolio trading?

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Gurps Kharaud: Hello everyone. Welcome to Market Matters on J.P. Morgan's Making Sense podcast. My name is Gurps Kharaud, head of equities digital markets, and Vida Portfolio Solutions. And today we'll be discussing the evolution of credit portfolio trading with Olivier Cajfinger, head of IG credit, public finance, short-term credit and alternative sales, and Peter Grant, co-head of credit systematic trading. Thank you, Peter and Olivier for joining me.

Peter Grant: Thanks for having us, Gurps.

Olivier Cajfinger: Thank you for having us, Gurps. It’s a pleasure to be with you today.

Gurps Kharaud: Okay. So Olivier, to start us off, what are some of the big trends you're seeing in credit portfolio trading, particularly in terms of client volumes, and any market stretcher elements that are driving this change?

Olivier Cajfinger: Absolutely. In fact, the recent market volatility that we've seen these last few days has really put an additional spotlight on portfolio trading as a key liquidity tool. During the sell-off that we've experienced, there were days where portfolio trading made up to 25% of trades flow, even with bid-offer spread being wider. It's definitely been crucial for risk transfer during these times, and portfolio trading have found a new kind of liquidity that we didn't have before. On top of that, if we look at the year-to-date data, clients volumes have jumped, with IG portfolio trading volumes up by 30 to 35% year-to-date. And you should think that PT now represents between 12 to 15% of the overall traded volume in U.S. IG. This really shows how much people are relying on portfolio trading these days.

Gurps Kharaud: Thanks Olivier. And Peter, over to you. How does J.P. Morgan manage its risks when it comes to different kinds of credit portfolio trading, and how are we differentiating ourselves versus some of our competitors?

Peter Grant: Sure. I think an interesting thing about credit is the market structure change that credit portfolio trading has brought in over the past couple of years. And credit has moved from being a trading protocol where you're buying one bond and then going out and trying to sell that exact same bond as a dealer, to one where you're buying many bonds through a portfolio or you're buying bonds through your algo or buying through the ETF channel. And as a result, it's turned into a liquidity aggregation problem. It's very important for dealers to be able to internalize the liquidity between those different trading protocols in order to minimize their turnover time. And it's not just to be able to sell the same bond anymore. Balance sheets have grown. So being able to manage factors, understand what the important factors are and decide when you should be managing factor risk versus being managing gross risk are all important parts of the toolkit to be able to effectively trade portfolios. As a result of that interconnectivity, dealers are really only as strong as their weakest link, and J.P. Morgan has done an excellent job in retaining the risk-taking culture and DNA that was so important when bonds traded more in a single name format and marrying that approach to a more systematic pricing methodology that helps it excel in portfolio trading and the algo.

Gurps Kharaud: Thank you, Peter. Very insightful. Olivier, given the changes that we've seen in the market and some of the volumes that you were talking about earlier, what changes are you observing in how people trade today compared to the past, and how important is the investment in technology becoming for your business?

Olivier Cajfinger: Yes, absolutely. We're definitely seeing a shift in how trading and PT trading is done. Portfolio trading has turned into a one-stop-shop solution, which is super valuable for our investors when fees are constantly being squeezed. It definitely offers a great value proposition for our investor, and the toolkit has grown as well with more use of TRS, more use of ETF, alongside the usual cash bond business that Peter mentioned earlier on. A few years ago, portfolio trading was mostly for strategic and directional trades, but now with competitive fees, the ability to handle big trade, sizable trade with an advanced technology and a variety of asset classes, it's being used more and more for tactical trades. This shift really highlights, in my view, how important it is for us and our clients to invest in technology so we can keep up with our client changing needs.

Gurps Kharaud: Thanks, Olivier. So you've explained it from the sales side, Peter, on your side on the trading side, how are you embracing this change?

Peter Grant: Yeah, I think the portfolio trading and the market structure that we were talking about before at large has massively liquefied the credit space. So both in terms of the amount of bid-offer charge, we've seen a significant amount of compression there, and in terms of the number of products that trace on any given day. There's just much more breadth in the market. And with more trading comes a lot more data and a lot more information that clients should be able to leverage, but so far there hasn't been enough of a link between the data that dealers have available to them as they watch flows come in and out and what they're making available to clients. And I think that a tool that we've created at J.P., Vida really tries to bridge that gap and it lets clients both look at liquidity on a line by line basis for trades that they've already created, and I think more interestingly, let's clients lean directly into J.P.'s instantaneous liquidity and current risk to build trades that will provide them best X. We plan to continue building out this platform and leading heavily providing market insights and other data that we think clients will find useful. And being able to lean into that type of data should be a real differentiator for our clients, both to expand their breadth but also to reassess the market, and as banks change the way they trade, let clients react and change the way they trade as well.

Gurps Kharaud: Thanks, Peter. That's a great introduction. And that's where myself and my team have worked really closely with yourself and your team as well as Caj's team to bring some of these capabilities for clients in a digital way. So marrying some of the things we've talked about earlier, Vida Beta One is the latest iteration of Vida Portfolio Solutions, which provides a range of different capabilities from creating portfolios to managing them, analyzing them, and then reporting on them. And some of the changes that we've spoken about in terms of not only analytics and pricing or products, many of these different things are in our roadmap that we have coming forward and we're really excited for some of the things we're gonna bring across TRS, ETF, and all of these different areas. The platform launched in November last year. We are already seeing impressive take up, and I'm sure with many of these different capabilities we've planned, we see this as really a hub that's only gonna grow as the investments and our client's interests in portfolio trading continues to grow. And now as we conclude, talking about some of the future developments, Olivier, what trends do you think will be shaping the future of credit portfolio trading?

Olivier Cajfinger: So looking ahead, portfolio trading is definitely becoming more of a cross-asset tool. Our trade markets are rich and the fixed income offering is wide. Clients are using PT across different asset classes like investment grade, munis, EM, and structure product like RMBS and MBS. Some clients are fixed income agnostic and being able to make asset allocations decision in one go and in size is getting more popular. This is happening globally too with cross-currency portfolio trading being something clients are considering and using more and more. Another trend is also the rise of thematic trades. More clients are interested in these, often driven by reverse engineering and developing specific investment thesis. And to help with this, we are working on narrowing the bid-offer spread, making these trades more accessible and cost-effective. These developments are really setting the stage for the future of great portfolio trading in my opinion, giving our clients more flexibility and opportunities in those markets.

Gurps Kharaud: Thank you, Olivier. And thank you, Peter, for sharing your insights on the evolution of credit portfolio trading. It's been a really insightful discussion. And for our listeners who are interested in learning more about Vida Beta One that we touched on earlier today, please check out the show notes where you'll see the relevant links to learn more. Thank you.

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