The e-Trading Edit is your annual insight into predictions for the year ahead. In January, 2023 traders across asset classes and regions share their views in our annual e-Trading survey, covering upcoming trends and the most hotly debated topics. How will your predictions compare?
Watch industry-leading experts discuss the results of this year's e-Trading Edit, including Scott Wacker, J.P. Morgan's Global Head of FICC e-Sales.
DAN BARNES: Welcome to Trader TV, your insight into institutional trading. I'm Dan Barnes. J.P. Morgan's latest e-trading survey has found that traders have new priorities and concerns in 2023 across asset classes. With me to discuss these results and implications are Scott Wacker of JP Morgan and Gordon Noonan of Schroders. Guys, welcome to the show.
SCOTT WACKER: Thank you.
GORDON NOONAN: Thanks, Dan.
DAN BARNES: Which challenges and new developments will be driving markets in 2023?
SCOTT WACKER: We had a bit of a change this year. Last year, inflation was the number one priority. But this year, there's more concern around recessionary risks, followed by inflation, and then geopolitical issues.
DAN BARNES: And Gordon, how do you see technology changing trading over the short and medium term?
GORDON NOONAN: Well, I think traders are very much now getting into the mode where they can use data bit more and be a lot more comfortable with the data that they can consume. Traders now have access to more tools. They're getting more data from the banks, ranging from equities, which is very, very data rich, all the way down to high yield credit, which is still light on data. And they're happy to use that data to provide better investment decisions on the fly while we're trading in-flight.
SCOTT WACKER: This year, we saw artificial intelligence and machine learning as sort of the number one technology innovations that's going to affect trading over the next three years, followed by API, connectivity, and integration. And then, the third one, which I think was quite interesting, is a view that the emerging blockchain technology is going to change things as well. How the market is harnessing this data using machine learning is evident.
But the second one, I think, is probably most poignant in terms of where electronic trading is going. The fact that more people are recognizing that API connections is really the cornerstone of enhancing electronic trading across asset classes. Transaction cost analysis, you need to use a lot of data. And if you want to enhance your training models, also, get more efficient outcomes, using data with sort of machine learning, reinforcement has played a huge part.
GORDON NOONAN: As traders have become more comfortable with the data, they've been getting a lot more comfortable asking questions and then querying the data themselves. And then we can go back to the sell side and query that data further and make suggestions. And we can work together. Guys like JPM have really pushed that forward with their JPM Markets tool, giving us more real-time data, which is only better for us and only better for our clients.
DAN BARNES: Scott, coming back to you, how do you see market structural change potentially impacting how and where people will be trading this year?
SCOTT WACKER: Really, the three biggest market structural concerns for clients were, first, access to liquidity, second, regulatory changes, and finally, market fragmentation. That's one of the things I think electronic trading really helps address. So by connecting through APIs, creating an automated process, we're able to give access to markets that typically might not be as easy to access.
And so as that grows, I think it's just going to continue to improve. And when you look at the world through the pandemic and particularly in 2022 where we saw unprecedented levels of volatility, essentially, we didn't see any major markets break down.
DAN BARNES: That's right.
SCOTT WACKER: No real flash crashes. And actually, the electronic portals were very, very resilient through a pretty testing period of time.
GORDON NOONAN: As we get more data, we're able to look at the pricing we get from different banks. We're able to then rate the quality of that pricing. If we see a material market impact, we know that although the bank has given us that price, how they're accessing that liquidity, where they're getting that liquidity from, we can gauge a lot better than the way we used to. Spreads have widened materially post the Ukraine invasion. Now, they have come down, and they've come back, but not to where we were prior to the invasion.
Liquidity is a bit thinner, and the depth of book is thinner as well. And we've noticed that from conversations with a lot of our banks. So on the back of that, we've had to change how we've executed with the market. And we have to constantly reassess going forward as we see changes in liquidity, adapt accordingly.
DAN BARNES: Scott, looking at inflation, how impactful will that be this year?
SCOTT WACKER: In last year's survey, inflation was the number one concern. This year, it's risk of recession. If you really think about it, one sort of leads to the other. The natural response to inflation is to raise interest rates. The whole purpose of raising interest rates is to slow the economy down. And essentially, a recession is a slowing down of an economy.
GORDON NOONAN: What we're finding is divergence in interest rates across different economies and different currencies. So all of a sudden, the points, the forward points that were being charged, is a lot more important than when everyone had zero interest rates. Before, we would be hyper concentrated on the spot spread. Now, we really need to start looking at the forward spread as well. And we have to look at the all-in costs for spot and forward. That is just as important now.
DAN BARNES: So Scott, what sort of institutional interest do you see in digital assets this year?
SCOTT WACKER: Interestingly, 72% said that they don't have any interest in trading in the next year with 6% saying that they did. We did see a rise in expectations over the coming years. But in the short term, it looks like perhaps the interest from previous years seems to be waning a bit.
GORDON NOONAN: The talk has very much moved away from people asking where Bitcoin pricing is going to go and the crypto bro kind of idea. People understand the technology a lot better. And I think there's a lot more nuance and a lot more education out there now from the buy side and the sell side about where we can go with digital technologies with regard to DLTS. It's not just about Bitcoin anymore. We're really looking at a wider scope.
DAN BARNES: That's great. Thank you. What are your expectations for electronic trading in 2023?
GORDON NOONAN: As people become more comfortable with the data, they can use post-TCA data to make a virtuous feedback loop into pre-TCA data and make smarter decisions. What we're hoping to do is allow automation and auto rules to allow us to trade smaller tickets more electronic. And we can feed that back through again in through our data and allow traders to concentrate on value add for PMs or concentrate on larger tickets.
SCOTT WACKER: If you look at the survey, 100% of the respondents said that they anticipate their electronic trading to grow. And if you think about machine learning and execution optimization, I think we're only at the beginning of that process. I think some of the advances in bringing the equity markets, such as the ETFs, into the fixed income side of the market is going to increase liquidity. I think bringing some of the tools that we've learned from foreign exchange, such as increasing internalization, creating SKUs, tiers, looking at mark-outs and responding accordingly, is, again, going to still bring further advances this year and in the years to come.
GORDON NOONAN: A lot of the buy side have always been keen to increase automation and increase electronification. What finally has happened in the last few years is that the EMSs have actually improved their functionality to allow us to realize a lot of what we planned on doing. So the quality of offering from the EMS is very, very important in this space. We need to introduce more logic there, more complicated rules that allow us then to increase our automation in a safe and risk-free manner where we can.
DAN BARNES: Gordon, Scott, that's been fantastic. Thank you.
GORDON NOONAN: Thanks very much.
SCOTT WACKER: Thank you very much.
DAN BARNES: I'd like to thank Scott and Gordon for their insights today, and of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to tradertv.net.
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FICC Market Structure: The electronic trading evolution
FICC Market Structure: The Electronic Trading Evolution
Kate Finlayson: Hi, I'm Kate Finlayson. I head up the FICC market structure team at J.P. Morgan. We follow trends and drivers of market structure change. Along with various policy initiatives, one of the largest drivers of change is the electronification of markets. I'd like to take a fresh look at this topic to understand where we're at in fixed-income markets. What automation themes we're seeing, and what could drive more electronic trading. To do this, I'm delighted to share the mic with Chi Nzelu, Global Head of FICC e-trading, and Andreas Koukorinis, Global Head of credit e-trading. Welcome to you both.
Chi Nzelu: Thanks, Kate.
Andreas Koukorinis: Great to be here.
Kate: So, today, I'd like to delve deeper into the detail of electronic trading, what trends we see emerging or advancing in different markets. Before we get into that, the term electronic is often used in different ways when it comes to trading so perhaps, we can frame how we regard it. For example, if a voice trade is consummated on a venue that could, according to certain metrics, be deemed an electronic trade. The bank of international settlements considers electronic trading to include electronic quote “requests," the quotation of prices or dissemination of trade requests electronically, and the matching negotiation or execution of trades through an electronic system. Do we see it that way?
Chi: So we have very similar definitions, but we see it more of a spectrum. We can think about all electronic markets or platforms starting with a voice trader triggering a price and depending on the evolution of market structure, we can get market data develop a systematic process to distribute prices, accept trades, and then systematic risk management. Across the different asset classes, we have some fully automated price accepts risk manage, and we have somewhere in the middle hybrid.
Andreas: Yeah, I think, uh, Chi is right on point. So, there is electronic transmission of trades which allows us and helps us to capture the data. And then there is algorithmic trading, which is based on building pricing and risk management frameworks on top of that data that will capture electronically and, ultimately, that leads to, you know, for lack of a better expression, no-touch trading where the request gets transmitted electronically and then both the price and the risk management happened algorithmically and, therefore, electronically.
Kate: Okay, that's helpful, thanks. So, with that in mind, we know that markets continue to evolve and we've seen some interesting themes emerge in electronic trading across fixed-income currencies and commodities. Andreas, what trends would you particularly highlight either because it's new development or has perhaps accelerated?
Andreas: So, in my mind, two things come up. One is execution protocols are based on streaming prices. So rather than have tentative prices or just responses to RFQs, the market has evolved where we are basically streaming two-way prices firmly on a variety of instruments. And then clients either click to trade or respond with their interest on the back of that price. That helps on two fronts. One is obviously allowing people to price discover in a more efficient manner, and second, our ability to internalize is so much greater, therefore, we can give better pricing. The second element, which is parametric trading, which is a protocol that has evolved on the back of protocols that have been prevalent in the muni-market in the US, is where clients submit their requests, not on a specific icing i-Security, but more using parameters on a basket of security. So, it could be rating, duration, spread levels, and so forth.
Kate: So, the increase in systematic funds in credit markets is having an impact in the trading protocols utilized by market participants. Is that right?
Andreas: Yeah. So, I would say there’s two things. First is obviously as the market gets more electronified, there's a prevalence of a number of platforms. The protocols become more standardized, availability of data, and so on so forth. Funds start emerging that have the capabilities of using that toolkit to participate in the market, but also existing funds that come predominantly from the equity or the FX markets are deploying their toolkit in the credit and possibly in the broader securities market and allows them to both be a liquidity provider, but also liquidity taker, which makes the market more complete. From our vantage point, that percentage was in the single digits, you know, in the last 18 months, and we expect it to be close to 20% to 30% in the next 5 to 6 years.
Kate: What else do you think could be driving these trends?
Andreas: I think really is the availability of data really is the biggest driver, and the second is the evolution of EMS and OMSs. And..yeah - that would be it.
Chi: So, we think a huge part of this is client expectation. So, a client who has traded US treasuries or European government bonds or foreign exchange or commodities may have unexpected format of the market. They may expect a two-way price with the inventory always available on a very competitive order book. As a result, that expectation goes back to the liquidity providers who now have to develop these capabilities for areas like credit.
Kate: One of the protocols that's gained a lot of attention in recent times has been portfolio trading. What are your observations there?
Andreas: Look, portfolio trading is really the protocol for immediacy, right? So, it really allows clients who want to do a large block transaction, whether it's in a concentrated basket or a well-diversified basket, to execute immediately and get the position they want on, rather than taking the market risk. It's not dissimilar to program trading from equities. I think what's been happening is obviously that is becoming a bigger and bigger proportion of the markets and that correlates well also with the increase in ETFs, and that gives us a lot of ability to improve our pricing engines. And I think more importantly because those baskets tend to have by construction some instruments that are less liquid, they are allowing the price discovery process for instruments that historically would not be trading as much to start finding traction in the market.
Kate: Chi, when it comes to algorithmic execution, spot FX is often in the frame and the use of algos continues to advance. What other asset classes are showing signs of adopting this form of execution?
Chi: Sure, just to start with, we think the use of algos in FX has also evolved. It's now driven by analytics. People are interested in understanding volume profile, market impact, feedback loops, specific to the proliferation across other asset classes. We think it's really driven by clients expecting similar functionality and we see that in areas like US treasuries, commodities, in particular, index products where you may have to execute 30 underlines and wrap that into one. As a result, the entry point into the different asset classes seems to be at a significantly higher level to what was done in foreign exchange with the expectation of clients around mentioned issues like volume profile and market impact. We see this continuing potentially into the areas like European government bonds and we're investing in those areas.
Kate: Andreas, you mentioned very briefly ETFs a little earlier. What are your observations there?
Andreas: The ETF market is evidently growing massively both in fixed income and in other instruments. We're close to 1,100, 1,200 ETFs trade globally then cover close to 90%, 95% of fixed income securities. In my mind, it's the perfect vehicle that allows both for risk management but also for the fungibility of security instruments into cash. So with the primary process, it really helps complete the triangle between single bond algorithm trading, portfolio trading, and ETFs, as it allows us to convert one instrument into the other by using sort of both the three legs of that transaction.
Kate: Interesting. Thanks. With these evolving protocols, the fact that there is this demand for firm streaming liquidity, for low-touch portfolio trading, what are the knock on impacts in terms of market infrastructure?
Andreas: I think the prevalent is the increased need for direct API. Both venues and platforms are going to be under pressure to modernize and bring better and faster protocols into the markets. Portfolio trading is a sort of pre-eminent one where things still have a manual component to it. I think as we evolve, there will need to be end-to-end connectivity. And the second is obviously we would prefer the direct connectivity to our clients and allows us to show better pricing and more liquidity as we can internalize easier with less information leakage.
Chi: I think there's also a knock-on effect for liquidity providers. There will be required investments for those who perhaps are unable to offer from streaming to develop those capabilities, as well as the combination of things that were separate like access and price discovery, we see those two things coming together, which leads to strong connectivity of inventory in-house and price distribution on electronic channels. So we expect that to drive more efficiencies.
Kate: Okay, so looking ahead to the future of electronic trading, the developments of your teams and how they look to enhance their skill sets. What work is being done to prepare the trading desk of the future from a sell-side perspective?
Andreas: Sure. So, a few things. Organizationally, we work very, very closely together. Traditionally, the trading desks have been product experts. The Strat teams have been engineering science experts. More recently we've been investing in training programs on data and analytics. We have over a thousand of our trading and sales colleagues that have taken that. We think that significantly advances the type of discussions we have around trading strategies and market evolution.
Chi: Yeah, I would say specifically for our teams is there's definitely a shift from just having the Strat function, connectivity and engineering to really trying to understand the risk management process and deploying systematic strategies at scale in the market. And really fine-tuning how we sort of accumulate and extinguish our inventory.
Kate: Okay. Well, I mean, this continues to be an evolving space. So many developments. Thank you so much for your insights today, Chi and Andreas.
Andreas: Thanks very much, Kate.
Chi: Thanks for having us.
Kate: And to our listeners, stay tuned for more episodes. Thanks for listening.
[End of Podcast]
Traders predict that 'Recession risk' will have the biggest impact on markets in 2023. Closely followed by 'Inflation' and 'Geopolitical conflict'.
Question asked: Which potential developments will have the greatest impact on the markets in 2023? (Rank in order of importance)
This chart reflects that traders predict Recession risk (30%) will have the biggest impact on markets in 2023. Followed by Inflation (26%), Geopolitical conflict (19%), Market and economy dislocation (14%), Government policy change (9%), ESG, Climate risk factors (1%) and Global pandemic (0%). For 2022: Inflation (48%) will have the biggest impact, followed by Market and economy dislocation (13%), Global pandemic (13%), Recession risk (5%) and ESG/Climate risk factors (3%).
For traders that predicted ‘Inflation’ to have an impact on markets, we asked them ‘What is your outlook for the impact of inflation when pricing it in for 2023?’, with 44% of traders predicting inflation will decrease.
Question asked: What is your outlook for the impact of inflation when pricing it in for 2023, based on the region you are located in? (Select one option)
This image shows that 44% of traders predict inflation will decrease. Followed by ‘Inflation will level off’ (37%) and ‘inflation will increase’(19%).
58% of traders surveyed based in the United States expect U.S. inflation levels to level off and 41% of traders surveyed based in the United Kingdom predict inflation to decrease.
Question asked: What is predicted impact of inflation, depending on the survey participants' location by region?
This chart displays what percentage of traders predict inflation to increase, decrease or level off, by their location: U.K., U.S., Rest of Europe and APAC. For U.K.-based traders, the graph shows inflation will increase (27%), decrease (41%) and level off (32%). For U.S.-based traders, the graph shows inflation will increase (10%), decrease (32%) and level off (58%). For traders in the Rest of Europe, the graph shows inflation will increase (13%), decrease (56%) and level off (31%). For APAC-based traders, the graph shows inflation will increase (25%), decrease (35%) and level off (40%).