Today’s low bond market volatility won’t last forever. But knowing whether a correction will come next week or next year isn’t so important. Having an efficient trading strategy that can execute in both tranquil and turbulent markets is.
Trading expertise has always been essential in fixed income because bond markets are highly fragmented. There are far more bonds than stocks in the world, and finding the specific security or block of securities you want requires perseverance and skill.
It has taken on added importance over the last decade, though, because bond markets aren’t as liquid as they were before the global financial crisis. When liquidity is less plentiful, relatively small events can trigger sizable price moves. The US taper tantrum in 2013 and the European variant earlier this year both come to mind (both sparked by central bankers hinting at plans to scale back or wind down stimulatory bond-buying programs).
We’re not saying that one of these events is imminent. What we are saying is that one will happen eventually—they always do—and that humans are notoriously bad at predicting their timing. That’s why it’s important to be prepared. And the best preparation in today’s fixed-income markets comes down to having superior traders and trading infrastructure.
The good news is that trading is slowly becoming more efficient and transparent—and that should enhance market liquidity. Twenty years ago, bonds were an over-the-counter market. With no centralized exchange, pricing was opaque. And those who wanted to trade could spend hours on the phone trying to find a broker ready to link them with a willing counterparty.
Today, the market has seen the growth of electronic multi-dealer platforms and exchanges that let a bigger pool of buyers and sellers come together, enabling buy-side firms to trade directly with each other.
Still, there are multiple platforms out there today, all varying in quality and reach. But traders only have one pair of eyes. That’s partly why we invested in our own platform, ALFA, which provides a comprehensive, aggregated overview of the entire bond market. This enhances transparency and efficiency. And with the full market landscape on one computer screen, traders are better able to find relative value opportunities. In order to bring ALFA to the broader market and to develop its ability to support all-to-all trading, we have partnered with ALGOMI,* which will develop, support and market the platform on an ongoing basis.