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Automated Credit Trading on the Rise

Traders Magazine Online News, December 5, 2018

Shanny Basar

Gareth Coltman, head of European product management at MarketAxess, said automated trading in credit markets is set to grow rapidly over the next 12 to 18 months.

Coltman told sister publication Markets Media that auto execution has been in the rates markets for some time but is now growing in credit.

"A surprisingly large number of clients are looking at how to integrate automation in their workflow,” he added. “Volumes in Europe are current small but will grow rapidly over the next 12 to 18 months.”

He continued that it is inevitable that technology will be adopted for scale and to meet the MiFID II best execution requirements. MiFID II went live in the European Union this year and included fixed income in the best execution requirements for the first time.

“Our research team has been working on transaction cost analysis  and allowed us to create a composition benchmark for execution,” added Coltman. “Clients can compare execution against our benchmark and also against the wider market on the platform.”

He continued that banks have been responding to requests for prices on an automated basis for a number of years but they were managed by a human trader. The banks had systems where prices would be sent out if traders did not intervene in a certain period of time to reduce missed opportunities.

However, the sell side has been developing systems which consume data and make decisions without the intervention of human traders, especially for smaller trades in more liquid instruments.

“This has been a growing trend, especially since MiFID II,” he added. “This is a welcome change as traders can focus on actively providing liquidity that clients need.”

MiFID II also introduced pre-trade transparency requirements and post-trade reporting in fixed income. Trax, MarketAxess’s reporting subsidiary is an approved publication arrangement (APA) under MiFID II.

“We are also focussing on pre-trade analytics, such as data on dealer axes and Open Trading axes, and we have integrated our APA data into Axess All,” said Coltman.

Axess All is an intra-day trade tape for European fixed income markets, providing aggregated volume and pricing for the most actively traded instruments.

Buy-side automation

The buy side is also investing in technology as it faces cost pressures, especially those firms with large passive mandates. Like the sell side, fund managers want to automate smaller orders and allow their human traders to focus on larger trades.

“We have been providing automation to the buy side for about five years where firms have been using limit orders,” said Coltman. “The big shift is automation of request for quotes for price discovery which is why we developed CP+ (Composite Plus).”

CP+ is MarketAxess’ proprietary algorithmic pricing engine for corporate bonds. The engine is updated every 15 to 60 seconds, depending on the liquidity of the instrument, and generates nearly 20 million levels per day covering 90-95% of trading activity in its markets.

Coltman explained that CP+ uses machine learning to provide an indication of where a bond might trade next.

“We are at the beginning of the process of learning how artificial intelligence can be incorporated into pricing engines and even pre-trade," he added. “For example, AI could indicate the likelihood of a large block being executed, and this data could be fed up to the portfolio managers.”

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