Published on Tue, 04/12/2022 - 14:42
Once upon a time … a tale of Portfolio Trade
- Portfolio Trade aims to promote the liquidity of fixed income securities by pooling them into a single basket to be processed in one go.
- This practice has generated sizeable interest among investors, gaining both efficiency and speed of trade execution inside a very heterogeneous fixed income market by nature (given interest rates, maturity, duration, etc.).
Some macro events (Central Banks fighting inflation, geopolitical tensions between Russia/Ukraine, presidential elections, the return of volatility, interest rate hikes, etc.) have created a market environment that led various players to further evaluate how to improve market liquidity.
For instance, several sell-side players are increasingly offering their buy-side clients a new trade execution method called Portfolio Trade (‘PT’), which became a key factor in improving both quality of execution and liquidity.
In light of the convergence between equity and bond markets’ trade execution approaches, this process allows buy-side clients to execute several trades at once ; all of which are grouped in a basket of securities that will be listed either partially or as a whole, rather than executing these bond trades successively. The objective is to improve the overall liquidity of the basket by ensuring that we can trade a whole set of individual bonds, made up of liquid and less liquid – or totally illiquid - ones.
From a practical point of view, Portfolio Trades are executed through trading platforms such as TradeWeb, Bloomberg TSOX, and also via Excel lists ; the first being the most commonly used intermediary between various major players.
These Portofolio Trades are usually handled in ‘Net Proceeds’ or in basis points/cents vs. midrange bid/ask spread on the European market:
- The ‘Net Proceeds’ represents the balance of cash obtained/or paid upon completion of the transaction,
- Depending on the type of bond : for USD bonds, market participants will prefer using the spread vs. T Note ; while on the EUR market, the difference vs. midrange, expressed in cash/cents, will be preferred.
About future evolutions of this trade execution style:
In 2021, the Portfolio Trade activity reached a record high. Some of our counterparties considered it the best year. A large number of buy-side players, such as NTEX very early on, have adopted this new execution practice.
The success rate of PT's execution on an electronic platform is around 95%, including illiquid bonds. In the fourth quarter of 2021, an increase of more than 35% was observed, compared with the same period the year before (source : Tradeweb).
Since beginning of 2022, the use of this method has further continued and now extends to baskets of only traditional bond lines ; with the objective to go beyond the mere recycling of illiquid bonds. Consequently, we’re witnessing an increased development of securities’ selection.
At NTEX, we have been using PT for several months now to empower our clients with a wider range of solutions beyond the primary sourcing of liquidity, and towards harmonisation of execution timing.
This required sitting down with our clients to provide support, raise awareness and share best practices about advantages (better liquidity, access to more axes, better diversification, entire basket traded) and disadvantages (required analysis time) of this new execution process, and further improve our partnership with them.
As for the nature of Portfolio Trades over the past months, we have executed very diverse portfolios, both in terms of scope (rates, investment grade credit, high yield credit,) and maturities (ranging from 2y to 15y and above) or size (ranging from € 5-10M to over €100M), on behalf of different types of clients.
Within the Fixed Income NTEX team, the use of portfolio trading is one of our major areas of development. As a trading desk and in the face of this new trend, we will endeavor to strengthen our methodology and analysis through the experience of our traders and Data Science teams first, and secondly from a close collaboration we have built with our counterparties ; aiming to stay one of the major players on the bond market.
By Anthony Pontes
Trader Fixed Income at Natixis TradEx Solutions
By Géraldine Dumont
Head of Fixed Income / Forex Execution at Natixis TradEx Solutions
By Laurent Albert
Global Head of Trading, Deputy CEO at Natixis TradEx Solutions