In-depth Market Analysis and Trading Prediction with Bloomberg

In this exclusive interview for WBR Insights, Nicholas Bean, Global Head of Electronic Trading at Bloomberg, shares his in-depth analysis on how credit trading is evolving, opportunities on the horizon, the electronification of credit markets and how to achieve best execution using the latest tools. Nicholas joined Bloomberg in 2014 after a career in banking and oversees the strategy and operations of Bloomberg's electronic trading solutions for fixed income instruments, FX and derivatives.

Tell us about yourself, your background and how you came to be Global Head of Electronic Trading for Bloomberg?

I started my career in the British Military working on strategic data communications utilising global radio and satellite networks. In the mid-90s, after five years of military service, I joined the technology department at a leading US bank. Web 1.0 was gaining relevance in finance, and I found my expertise was in demand.

During the very early 2000’s, as Web 1.0 pivoted to Web 2.0, the use of technology for inter-entity execution in OTC markets started to gain traction. The trading leadership at my bank became much more interested in technology as an enabler to trading rather than it being a utility to trading. Ultimately, I transferred from technology into the trading group to integrate and maximise the opportunities afforded by this ‘new’ way of trading in OTC markets.

Over the next 12 years, I had the opportunity to work with trading, sales, engineering and vendors across the industry to drive the electronification of OTC markets. This included key developments at the time such as sell-side automation, auto-hedging and counter-party behavioural analytics. But ultimately, if you really want to be at the cutting edge of fintech, you need to work at a leading technology firm like Bloomberg.

That opportunity was offered to me in 2014, when I joined Bloomberg’s Electronic Trading business, and I have not looked back since. Bloomberg provides a highly innovative and dynamic work environment, and since I began working here I have been trusted with an increasing number of responsibilities. I am now the Global Head of Electronic Trading Solutions overseeing the strategy and operations of Bloomberg's trading platforms and related services.

How is Credit Trading Evolving?

Credit trading is changing at a rapid pace. Sell-side balance sheets continue to shrink, as do the number of securities held in inventory, and e-distribution strategies have transitioned from scale to profitability. At the same time, the buy-side continues to look for ways to improve speed, accuracy and quality of execution - while minimizing tracking error or trying to outperform performance metrics, which can include a Bloomberg Index or our Evaluated Pricing Service (BVAL). These seemingly conflicting needs have forced the sell-side and the buy-side to seek additional types of execution models and mechanisms for risk transfer.

The recent growth in passive investing - with index tracking, macro trading strategies, the increased usage of index-linked ‘beta’ products, along with the use of passive investment e-trading solutions - have largely been driven by buy-side firms to achieve economies of scale and price improvement. The sell-side have embraced these new mechanisms of risk transfer because buying macro themed risk creates opportunities. Solutions such as fixed income portfolio trading and the ETF create and redeem process, as well as efficient hedging via liquid index-linked ‘beta’ products such as ETFs, CDS, Index TRS, and Index Futures, allow sell-side firms to maximize profitability while minimizing balance sheet usage.

Market participants continue to expand the use of trade automation to free up time for more complex workflows. They also increasingly incorporate price transparency tools to support the pre-trade decision-making process - including which securities to buy or sell and where best to trade them. This enables them to demonstrate best execution, conduct transaction cost analysis (TCA), and to determine which sell-side relationships to engage directly and when to engage on an all-to-all network, such as Bloomberg Bridge, to expand their liquidity network.

Can you tell us what are the next big trends in the electronification of the Credit market?

As the growth of passive investing continues, and market participants trade macro themes for cross asset exposure on a global scale, there will be a greater need for additional protocols and products that help express tactical views, hedge strategic risk, locate relative value opportunities, and improve liquidity management more efficiently. While fixed income portfolio trading and ETFs will continue to be extremely relevant, new innovative ideas and products such as Bloomberg’s Tradable Trackers will provide firms with new trading tools.

Tradable Trackers is a suite of indices constructed with a number of liquid individual securities that are designed to be highly correlated to Bloomberg’s flagship Fixed Income Indices, and will align with additional ‘beta’ products (standardized and listed derivative instruments) to help clients better manage their portfolios. Pricing will be provided by BVAL’s intraday pricing product, IBVAL, which has been enhanced to bridge the gap between trading and index pricing.

New tools like the Tradable Trackers also help firms to identify unique themes and opportunities to surface liquidity and optimize portfolios. In their search for additional liquidity, market participants may also start to think about generic/attribute trading, where a client’s passive investment strategy is broken down to its attributes, allowing liquidity providers to determine how best to meet those needs.

Trade automation and Transaction Cost Analysis (TCA) will also continue to be major themes as clients look to streamline and introduce greater efficiency into their workflows. In addition, continued sell-side automation via algos will facilitate pricing of these additional protocols and products with superior speed and accuracy.

How will rising inflation, the impending recession, withdrawal of liquidity, post pandemic behavioural shifts, political conflicts and other geopolitical factors affect trading in the next 3-5 years?

Each one of these factors taken in isolation could have major market implications. In combination, market participants may witness ‘a perfect storm’ that will include expectations of further interest rate hikes, quantitative tightening, a continued widening of bid-offer spreads, and the possibility of more defaults. This environment will likely foster a decrease in new issuance, which can negatively impact secondary market trading volumes, and cause a further reduction of market liquidity due to limited sell-side balance sheets.

It will be increasingly important during these times, where there is a potential risk of a supply and demand imbalance, for market participants to incorporate best in class price transparency tools, data, and analytics, such as the ones Bloomberg offers, into their workflow. This will enable them to make informed trading decisions, including which securities to trade, which execution protocols and products to use, which counterparty to engage directly, and whether to add an all-to-all network, such as Bloomberg Bridge, to broaden their pool of liquidity. Trade automation will also continue to be key, as it frees up time to focus more on macro strategy analysis and trading. Transaction cost analysis to measure post-trade performance, which can then be used to inform the pre-trade process, will also be important.

What are the greatest needs and requirements of the buy side FX dealing desk to access new liquidity pools, better analyse trade performance and achieve best execution?

The FX desks at buy-side firms often manage the aggregate exposure from trading activity spanning multiple asset classes, and seek liquidity through a variety of execution methods that suit their trading style, hedging profiles and risk appetite. To achieve best execution, they prefer consolidated access to multiple liquidity providers, both global and regional, in a single application covering all instruments.

Increasingly, firms are leveraging post trade performance metrics such as response time, fill ratio, spread, market impact and cost of trade reject to improve pre-trade decision making. FXGO provides access to more than 800 banks in more than 140 countries and offers a variety of performance metrics and data to ensure best execution.

In your opinion, what level of impact will new technologies such as automation and trade performance analysis have on traders in the next 3-5 years?

It is hard to find a trading desk who is not already performing some level of trade automation today, be it zero or partial touch.

This trend is set to grow in the coming years as data and advanced analytics will continue to influence and boost the rates of automation firms are looking to achieve. Technology will increasingly enable traders to synthesize the vast amounts of data available, and empower them to make better decisions which ultimately satisfy their best execution objectives.

We are already seeing signs of this evolution today with trading desks who use TCA to not only evaluate the performance of automation post-trade, but as a trigger for initiating automation in the first place, for example by making order evaluations against estimated market impact (EMI) or probability of execution metrics.