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2023 Survey Results
Eddie Wen, J.P. Morgan’s Head of Digital Markets, shares his insights on how trading desks are managing liquidity challenges in 2023.
Josephine Gallagher: Welcome to Trader TV at FILS, your insight into institutional trading. I'm Josephine Gallagher. Today we are discussing how trading desks are evolving in response to liquidity challenges. And we have Eddie Wen at J.P. Morgan joining us today. Eddie, welcome to the show.
Eddie Wen: Thank you for having me here. Over the broader last several decades, the markets have continually moved toward a more electronic landscape. And from the buy-side as well as the sell-side perspective, they're both adapting to these changing liquidity dynamics.
Transactions are happening more electronically. The number of trades that we are processing on the sell side is increasing. The costs of execution's generally going down. However, the dynamics of how you trade and what you trade with and what platform you use and how much investment you make, these are general challenges a lot of the buy side and sell sides are facing.
Josephine Gallagher: OK, and how is J.P. Morgan evolving its trading function?
Eddie Wen: First, I mentioned already it's embracing electronic trading. Every trading desk will have an electronic trading team that understands the technology market structure as well as have the quantitative skills to analyze a lot of data to be ready for this change.
Secondly, it's really embracing data analytics and the more recent topic around AI. Generally speaking, with the digitization of the workflow, businesses are becoming more automated. There's a lot more data on the back of it. The ability to analyze the data and use it to optimize our business and having the capability of doing that consistently and continually over time, I think that's been a huge advantage.
Thirdly, I think it's really around promoting economies of scale. The numbers do start to add up. And especially as margins are compressing, the cost of execution becomes a big factor when it comes to a dealer's ability to service a large number of customers.
And finally, I think one of the biggest benefits for electronification is it allows us to break down many of the silos. Historically, when we look at the organization structure and how we manage our business, typically they are focused along vertical product lines. And increasingly, you're seeing the risk characteristics of different products look very similar.
Take, for example, in our credit and equity space, we recently combined the credit and equity businesses together. Products like single-security trading, portfolio trading, ETF trading, all that is now managed under one team under one technology platform and sharing a lot of the risk characteristics that benefits all these businesses together if you put them in one package.
Josephine Gallagher: Fantastic. And what are the services that are seeing the most engagement?
Eddie Wen: There's been a general uptick across all electronic trading product development. I think you'll see that a lot of clients are trading more electronically simply because it's easier. And the cost of execution has been a lot lower. Specifically in areas like credit, electronification has really taken hold, particularly around portfolio trading, as well as ETF. That's been the growth area.
In areas like foreign exchange and interest rates, uptake of algorithmic execution has been the focus. We recently launched a U.S. Treasury algorithm that allows clients to execute benchmark treasuries algorithmically very much like the way people have done it in equities and foreign exchange. That's been a new product innovation.
Productization of data analytics has been a really interesting area. We've been building a lot of tools that takes advantage of the information that J.P. Morgan has and provide analytics for our clients. Like, for example, in foreign exchange, we have a product called net flows, which allows us to present to a client the aggregate flow characteristic that we're seeing in the foreign exchange market.
We have a portfolio analytics solution, which started in an investable index area of the business in equities and now is being expanded to delta 1 as well as credit and loans and allow those products to have the same analytical capabilities that's built for another asset class.
I would say that in general, providing workflow solutions that help client do business with the bank has been a big focus. Software that we're building, getting them much more integrated with the bank, making their jobs easier has been a huge focus on product development.
Josephine Gallagher: I'd like to thank Eddie for his insight. And thank you for watching. This has been Trader TV.
FICC Market Structure: The electronic trading evolution
February 21, 2023
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%).