A tech-powered approach to bond trading that prices hundreds of securities all at once just had its busiest-ever month, the latest sign that systematic methods are rapidly disrupting the world of fixed income.
So-called portfolio trades are thriving, with market players harnessing exchange-traded funds to move baskets of bonds in one swoop as the pandemic whipsaws the credit cycle and liquidity costs bite.
Almost $19 billion of these transactions were processed globally through Tradeweb Market Inc.’s electronic platform in October, according to the company. That was the most since it launched in early 2019, and the service has now handled volume totaling more than $150 billion.
It’s a rare insight into the explosive growth of portfolio trades, which are flourishing as a quiet liquidity crisis grips the global credit market. With investors hoarding bonds as demand surges, crushing trading volumes and stoking deal costs, these ETF-centered transactions have become a vital tool.
Portfolio trading “is gaining momentum at a rapid pace,” said Stuart Campbell, head of trading at BlueBay Asset Management, who has done transactions of this kind in dollars and euros. “Certainty of execution, better pricing, sourcing bonds and speed” are just some of the benefits luring investors, he said.
ETF Boom
Portfolio trades have been made possible by advances in technology that allow even complex packages of bonds to be priced quickly. Low liquidity in some of the securities is addressed in this way by moving them in a bundle.
The trades don’t have to be linked to an ETF, but they tend to take advantage of the way ETF shares are created and redeemed.
Intermediaries known as authorized participants swap a basket of assets matching the fund’s profile for shares from the ETF issuer, or vice versa. Since this process happens in bulk, APs are happy to do large-scale trades with others in the market.
It’s impossible to know exactly how big the business has become. Tradeweb’s competitor MarketAxess Holdings Inc. doesn’t publish data, while individual banks can price bond bundles using their own systems. Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb in providing fixed-income trading services.
The Tradeweb numbers offer evidence that industry growth has accelerated this year alongside the boom in bond ETFs.