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Buy-side traders opt for derivatives automation in pursuit of timing and pricing precision

Buy-side traders opt for derivatives automation in pursuit of timing and pricing precision

Increased capacity and efficiency have been key drivers of automation, with the introduction of new technologies at the trading venue level facilitating the implementation of new trading styles. Tradeweb’s Robert Marchetti and Charlie Campbell-Johnston, and Invesco’s Karim Awenat explore the impact of high-volume trading and expanding trade sizes, and why derivatives trading is fertile ground for automated solutions


  • Robert Marchetti, Co-head, Emea sales, Tradeweb
  • Charlie Campbell-Johnston, Head, integration and workflow solutions, Tradeweb
  • Karim Awenat, Head, fixed-income trading, London and Apac, Invesco

What journey have firms been on in the past few years in terms of automation, and what have been the drivers behind trading automation?

Charlie Campbell-Johnston, Tradeweb
Charlie Campbell-Johnston, Tradeweb

Charlie Campbell-Johnston: Tradeweb entered the European market in 2000, sparking discussions that initially revolved around the benefits of electronic versus voice trading. Fast forward to 2012 and these conversations had progressed, shifting the focus to trade automation. Tradeweb has been at the centre of those discussions, launching our first automation tool 12 years ago. Over that time, we have seen the conversations progress to the present day, where large buy-side trading desks are no longer asking what they should be automating, but rather how much.

As with the adoption of any workflow solution, nuances have developed over time and we are now seeing engagement with automation in three ways: high-touch, low-touch and no-touch.

No-touch is where a smart order router sends orders through the venue, which are executed automatically. In low-touch trading, the trader decides which orders to take from the order management system, manually routing them on the trading platform and receiving the executed trade confirmations. In a hybrid model, traders submit orders to the Tradeweb platform, with Tradeweb automatically executing some orders, while traders retain a last-look option to manually approve or decline specific trades.

Karim Awenat: The fixed income market has learnt a lot from the equities and futures markets with regard to automation. Invesco uses semi-automated trading, similar to the low-touch order method applied in equities. We monitor incoming orders and assess whether that specific market exhibits sufficient liquidity to engage in semi-automated trading. The order is subsequently sent to a venue of our choice, which then selects the dealers. The trade is then executed within predetermined price tolerance parameters, typically proceeding only if a minimum number of responses from dealers align with the received prices. This allows us to execute a substantial volume of trades, often with low notional values, while maintaining exceptionally tight bid-offer spreads. Importantly, this is achieved without imposing additional operational burdens on the trading desk’s capacity. The pursuit of increased capacity and efficiency have been key drivers, and the advent of new technologies at the trading venue level has facilitated the implementation of these trading styles.

Is automation purely an operational cost-saving measure? What other benefits does it offer?

Charlie Campbell-Johnston: The benefits of automation extend beyond execution and workflow management. Data derived from automation can now aid in validating hypotheses, enabling traders to evaluate trade size expansion depending on liquidity and market conditions. Measuring cost savings – whether in transaction costs or operational efficiency – elevates automation, making it a compelling choice.

Additionally, automation has created new opportunities in certain areas of trading. Thanks to faster market access, trading desks can engage in trading activities that were previously inaccessible to them. This is especially true in systematic trading, where automation not only automates existing manual processes, but fosters entirely new trading activities.

Month-end trading – particularly in real money and index sectors – has become highly concentrated within a short timeframe. Managing this activity with low market risk and optimising workflows are critical. By leveraging automation, we've made substantial investments in capacity and technology to handle this surge in trading. Tradeweb's tools – such as time-release functionality – are valuable during high-volume trading times, such as month-end index house activities.

Karim Awenat: Without a doubt, automation has added a high level of operational efficiency, but its significance extends beyond mere cost savings. Three notable advantages arise from automating highly liquid instruments. Firstly, it frees traders' time – which is particularly evident in scenarios such as trading a small five-year German Bund order with prices tightly clustered within 0.2 cents. With automation handling routine tasks, traders can focus on optimising returns in less liquid instruments with wider bid-offers.

Secondly, portfolio managers have a lot more flexibility in precisely managing their portfolios. In the pre-automation era, a portfolio manager might have opted to buy a single bond to quickly attain the desired market beta and then trade into specific smaller instruments. Through automation, we enable them to buy a diversified set of 20 bonds efficiently, achieving both beta and alpha without incurring dual bid-offer costs.

The third advantage is the transparent evaluation of how our counterparties provide us with liquidity. Automation eliminates the unconscious biases that might influence human dealer selection, allowing us to objectively identify our best liquidity providers. This valuable insight, coupled with bid-offer cost control, enhances our decision-making process.

What opportunities have arisen from the move to multi-asset trading?

Charlie Campbell-Johnston: In the past decade, a consistently small number of traders have been required to handle a greater volume of trades – often across multiple asset classes. In Europe, traders often specialise in various asset classes such as credit, derivatives, exchange-traded funds (ETFs), rates, and foreign exchange, working together at the same desk. As trading desks become increasingly multi-asset, they are looking for efficiencies and automating wherever feasible. A system that provides a consistent approach across different asset classes, while addressing multi-asset nuances and execution objectives is crucial.

Automation is, therefore, helping enable cross-asset desks to engage in multi-leg strategies they couldn't before, facilitating connections across different markets and interdependent trading orders.

A great example of this is the harmonious relationship between credit and fixed income ETFs as a means to enhance portfolio diversification. This type of multi-asset trading has brought notable opportunities because traders with equity backgrounds are now adopting this workflow in their fixed income activities.

How is automation impacting hedge funds adoption?

Robert Marchetti, Tradeweb
Robert Marchetti, Tradeweb

Robert Marchetti: Systematic trading plays a crucial role in the hedge fund adoption of automation, because it can generate trade ideas with significant impact.

Additionally, when hedge funds explore new asset classes that might be less familiar to them, adopting no- and low-touch approaches has proven beneficial. These methods enable them to review and execute trades without having to interact with the user interface directly, while seamlessly extending existing multi-asset trading practices.

Also, when hedge funds are dealing with multi-legged trades, where various products are traded interdependently, the platform's tools offer the capability to automate these processes directly. This is especially valuable for hedge funds as it allows them to execute trades promptly, aligning with the fast-paced nature of their business, while minimising the number of touchpoints required for market entry and exit.

What are the most challenging aspects of the move to automated trading?

Robert Marchetti: Clients are all in different phases of adopting automated trading. For example, those who come from different market segments or those primarily trading equities are more accustomed to trading on order books in an automated manner. Others are less familiar with the technology, and it can take some time to get comfortable with various aspects, such as the trade size, the psychological barrier of not physically executing trades, and the adjustment for those who have recently transitioned from voice to electronic trading and are now looking to further automate their processes.

We anticipate that as traders become more comfortable with automation, they will gradually expand their trade sizes and as they gain familiarity with the tools provided by automation, they will begin to recognise their usefulness in areas such as dealer selection, trade timing and order execution.

What direction do you expect automation to take? Where's the next area or asset class to automate?

Charlie Campbell-Johnston: Clients typically start with more liquid financial instruments such as cash rates, but the greatest potential for automation lies in derivatives – especially with hedge funds showing increased interest. As the level of comfort with automation grows, adoption can be swift – particularly in areas such as interest rate swaps (IRS) and credit default swaps (CDS), where it has room to expand as more transactions are cleared and move onto electronic trading platforms.

Robert Marchetti: I expect further automation in derivatives, particularly in CDS and areas where trading in certain index series is limited. Automation is well-suited for situations with multiple dealers offering various algorithmic strategies and streaming data, and standardised identification facilitate trading on the platform. As clients increasingly engage in larger trades, they benefit from the efficiency and flexibility automation offers in terms of timing and pricing strategies.

Karim Awenat, Invesco
Karim Awenat, Invesco

Karim Awenat: Within fixed income trading, automation will continue to be an important factor, but I foresee a trend toward semi-automation over full- or no-touch automation. Successful automation is contingent on market clarity regarding midpoints and bid-ask spreads. For example, a 10-year GBP IRS, with its liquidity and transparency, is a viable candidate for automation. However, challenges arise in less standardised maturities, such as trading a forward-starting GBP IRS – for example, a seven-year swap that starts three years from now, where dispersed price ranges due to differing dealer models make full automation less appropriate.

What will automation look like five years from now and what does this mean for the role of the trader?

Robert Marchetti: Over the next five years, as trade sizes increase, more pre-trade information will be available and the low- and no-touch trading categories will continue to evolve.

As automation becomes integral to trading, traders will adapt and learn how to leverage technology effectively. They will shift from manually executing every trade to using various tools for efficiency, timing, best execution and cost analysis. Their role will focus on dealer selection, liquidity and more efficient trading methods, allowing them to monitor and manage their different trading styles effectively.

Charlie Campbell-Johnston: The transition from voice to electronic and voice to automation encountered resistance and, in some cases, was considered a threat to established trading practices. However, the core role of a trader has not undergone a fundamental change. The trader's relationship with sell-side counterparties remains essential, but the mode of communication and data usage changes.

The focus will shift towards automation 2.0, optimising the number and type of counterparties to achieve specific execution outcomes. This approach will incorporate algorithmic scenarios based on execution criteria, market conditions and more. Traders don't necessarily need to be more tech-savvy but must understand how technology can enhance their performance. While trade ideas remain constant, the emphasis will be on leveraging technology for execution, offering traders a wider range of options for strategy implementation beyond counterparties.

Karim Awenat: The key here is ensuring that traders understand the dynamics of each market – particularly how it is evolving. What may have exhibited high liquidity in the previous month could suffer a significant dislocation, such as during the liability-driven investment event last year. This is why we opt for a semi-automated approach. It ensures traders remains central to the process and can quickly adapt to changing conditions. This eliminates the need for frequent updates to a rule book every time the market changes. I do not foresee a fundamental shift in the markets compelling us to give up this flexibility, although I acknowledge that improving liquidity might progressively allow the inclusion of more instruments deemed liquid enough for our approach.

The panellist’s responses to the Q&A were made in a personal capacity, and the views expressed herein do not necessarily reflect or represent the views of their employing institutions.

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