DAN BARNES: Welcome to Trader TV your insights into institutional trading I'm Dan Barnes. I'm joined today by Kate Finlayson, Global Head of FICC Market Structure and Liquidity Strategy at JP Morgan. We're going to be talking about the structural developments in the fixed income space. Kate, welcome to the show. 


KATE FINLAYSON: Great to be here. 


DAN BARNES: So, first of all, what are the big themes you're seeing this year? 


KATE FINLAYSON: So my team focuses on what could influence the provision of liquidity in the market and how it's accessed. So that could be formative policy proposals to emerging macro structural trends or trading techniques. On the policy side, I'd say cost of capital is front and center. So that could be the requirements relating to the central clearing of US Treasury transactions, both cash and repo, as well as the capital requirements arising from Basel III reform as that's implemented across jurisdictions. All of these feed into the cost of liquidity, and ultimately, the cost of execution for investors. 


DAN BARNES: That's very good. And you said you deal with policy and microstructure. On the microstructure side, looking at the effect of electronification, how are you seeing that play out across assets? 


KATE FINLAYSON: I think we've seen a more fundamental move to the automation of workflows for sure. So whether that is formalizing or consummating a trade electronically, to more systematic strategies being deployed in credit, to parametric trading, the ETF create-redeem process and the interlinkage with that and portfolio trading, algorithmic trading, direct streams-- so click to engage, click to trade. Even the application of distributed ledger technology as increasing use cases get deployed there, all of which JPMorgan is actively incorporating into its client offering. 

So some of these electronification trends could be born out of automation, or it could be to serve a specific purpose or an objective-- a different tool in the tool kit, really. I think there's plenty of room to run in terms of electronification for sure. But relationships still matter, particularly in times of stress. 


DAN BARNES: Data is key to the process of electronification. How are you seeing that play out across assets? 


KATE FINLAYSON: So with the increase in data, that obviously does come with benefits. We develop algos at JPMorgan, not just equities and futures, but in the FICC OTC space as well. So treasuries, FX, obviously, and progressively more in credit. 

So when you're having more data points, that, of course, allows for the more formation of those algos, which is a great thing. On the other hand, if you are a liquidity provider that warehouses risk, we're, of course, aware of the market impact associated with information leakage, as our clients that are concerned about too much information on their trades being publicly disseminated. So it's a balancing act. 

But with increases of transparency when we look at TRACE, for example, in the US-- the move from T+ 15 minutes to 1 minute. Then look at US Treasury transactions on a trade-by-trade basis, the formation of a consolidated tape. With all of those, there is also the look at the transparency regime, particularly in the EU and the UK, that underpins and supports that tape. And, of course, these developments are really quite formative. So it's important that people get engaged and participate so that they can have a say as this develops. 


DAN BARNES: Now, platforms are a key part of electronic trading as well. What are the regulatory views currently on multilateral trading? How is that changing? 


KATE FINLAYSON: So this is something we've been focused on as we see regulators in the EU, the UK, and the US look at multilateral trading. What constitutes multilateral trading? And the system that facilitating that potentially needing to register as an MTF or an ATS.

And the buy side and sell side have been focused on this as EMS functionality-- Execution Management System functionality-- starts to gain traction in fixed income. I think we will see some clarity fairly soon as EMS providers-- some of them stepping up and saying, actually, I'm going to lean into this and be a regulated trading venue. And others will make their case as to why they are not, or adapt. 

So what we're looking out for here is how this impacts their business model and the costs associated with using this increasingly used functionality. So we may see the formation of more trading venues, which brings an element of diversity and competition, which is great for healthy markets. Or it could mean that certain technology innovators feel that they're no longer able to compete because of the costs associated with being a regulated trading venue, which, of course, wouldn't be good, as that then runs the risk of knocking out channels of liquidity. 


DAN BARNES: Good point. Absolutely. And then looking at alternative products in the market, the expectation to some extent was that over-the-counter products might see a flow towards futures or cleared OTC trading as the cost of trading increased. Has that happened? What's your perspective? 


KATE FINLAYSON: Well, we've been keeping a lookout for that. I think there was a broad expectation that there would be a significant shift because of the costs associated with, for example, uncleared margin requirements with the Standardized Approach to Counterparty Credit Risk-- SA-CCR. So while we did see a small uptick in the use of exchange for related positions at EFRPs and some optimization opportunities there, we haven't seen a significant shift in the market structure due to regulation.


DAN BARNES: And then AI has been a big topic of conversation in the press and at conferences. What's your view on the impact it's actually having on markets? 


KATE FINLAYSON: You're right. Everyone is talking about it. And look, it's an exciting topic. We've had the application of machine learning and reinforcement learning across certain asset classes for some time. We deploy AI techniques to write code which helps to enhance algo pricing. But as of yet, we haven't used AI techniques in a vacuum. So decision-making is quite carefully controlled there. But it's an interesting space and lots more to see. 


DAN BARNES: That's great. Kate, thank you so much. 




DAN BARNES: I'd like to thank Kate for her insights today, and, of course, you for watching. To catch up on our other shows, including Trader TV this week, at 6:45 AM UK time every Monday, go to TraderTV.net.