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Enduring in Extreme Conditions, Portfolio Trading Is Now Ready for the Mainstream

Portfolio trading will increase liquidity in historically less liquid corners of the bond market.

Tom Bradley
Sep 09, 2020

Over the past few years, a few agitated analysts have predicted a rocky road ahead for illiquid fixed income assets and ETFs. If markets turned volatile, buyers would disappear, sellers would slash prices, starting a vicious cycle of fire sales and devaluations. Then, COVID-19 hit, sending global markets spinning. Whilst a predictable risk-off appetite prevailed it wasn’t quite the predicted risky debt doomsday, even those bonds issued by distressed hospitality and travel firms continued to trade to some degree, albeit at much lower prices, and the much feared ETF basis risk didn’t materialize as destructively as predicted.

One reason for the markets ability to function in an unprecedented time was the increasing popularity of portfolio trading—bundling multiple bonds into a single trading package. Portfolio trading lets trading desks look at the wider risk profile of a package of trades, rather than making decisions about how individual trade inquiries might affect their risk position and liquidity. As the least-liquid individual issues saw market interest wane, they could still find buyers when packaged into a portfolio. Essentially, bundling transformed idiosyncratic company risks—which are hard to judge, especially in a crisis—into more general credit and interest rate risks, which are much easier for trading desks to hedge. While portfolio trading didn’t necessarily outperform during peak volatility spikes, it did allow investors to send more trades to the market efficiently during the lulls.

Portfolio trading has something to offer every player

Portfolio trading’s steady performance in rough weather is only one of the reasons why its popularity has skyrocketed. It’s a strategy that benefits all parties.  For the investor, transacting multiple trades at once instead of line by line significantly increases efficiency and adds transparency to the liquidity picture. It allows dealers to price securities as a package, instead of one by one, encouraging better execution. And it makes life easier for advisors trying to tailor separately managed accounts for their clients. It’s no wonder then that cumulative portfolio trading volumes globally on bond trading platform Tradeweb topped $100 billion in June and are growing across other trading venues too.

Overcoming the final barriers

The meteoric rise of portfolio trading still faces three main forces of resistance:

  1. Limited access. Portfolio trading is only available to players who are onboarded with large institutional liquidity providers and trading intermediaries (notably, TradeWeb). Individual investors and advisors cannot send portfolios to any of these parties for a transaction
  2. Lack of technology. Portfolio trading is incredibly time inefficient without advanced technology. Trading portfolios manually, routing 20, 30 or 50 trades at a time to 10 different counterparties, then receiving consolidated replies involves an unimaginable number of manual RFQs, spreadsheets, crosschecks and human errors. Over the past few years, the market as a whole has benefited from technologies such as RFQ processing and trading APIs, but smaller players lack the resources to benefit from these innovations
  3. Cultural inertia. Institutional portfolio managers and credit analysts are trained to see each holding as a bond in a portfolio, rather than a portfolio of bonds. Portfolio trading feels unnatural to many still, unless they are reallocating cash across a portfolio. It will take time to acclimate their habits to the new environment

How YieldX puts portfolio trading within reach of advisors and individuals

YieldX is committed to democratizing access to the groundbreaking innovations that are transforming fixed income trading—including portfolio trading. We are fully onboarded with the top trading desks across Wall Street, offering smaller players a gateway to improved liquidity and efficiency. Our clients can leverage our data integrations on over a million assets as well as our investments in the powerful analytic and optimization tools required to execute complex portfolio trades.

YieldX is not only leveraging industry innovation, we are also driving it: as technology like ours helps fixed income managers become more quant and factor-driven, portfolio trading will become the norm. Talk to us about how YieldX can help you get started in portfolio trading


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