When the Asia fixed income desk of a major European asset manager realised that it needed to increase time efficiencies and market reactivity while trading Chinese bonds, it looked to adopt a process that was already in used by its Japanese and Australian government debt traders.
The desk deployed Tradeweb’s Automated Intelligent Execution (AiEX) tool to programme its orders and set them for time release and execution, according to a desired set of parameters. The requests for quote (RFQs) for the Chinese bonds were scheduled to be released at market close, freeing up the traders’ time to focus on the tickets that required their expertise.
Laurent Ischi, who heads Tradeweb’s AiEX and Workflow Solutions in the APAC region, believes that the number of customers using AiEX could grow fourfold by the end of this year compared to figures from the APAC market in 2020. While asset managers form the bulk of early adopters, several hedge funds and sovereign wealth funds have subsequently embraced the tool, increasing the number of use cases.
Despite a late start in Asia, automation adoption has caught on rapidly. Tradeweb now sees its APAC clients lead the way when it comes to harnessing the power of certain advanced automation products and protocols.
Bridging gaps between China and the world
A major driver is the growing importance of China — the world’s second largest bond market. China continues to improve access to its local currency bonds and provide improved tools for risk-hedging — notably with the launch of the Bond Connect channel in 2017 and, more recently, with the introduction of Swap Connect this past May. Participating in the nation’s $20 trillion bond market has thus become more attractive.
Furthermore, continued inclusion of Chinese bonds into major global fixed income benchmarks — the FTSE Russell World Government Bond Index, the J.P. Morgan Government Bond Index -Emerging Markets, and the Bloomberg Barclays Global Aggregate Index — has led to expanded trading in CNY securities, including as part of routine portfolio rebalancing. Previously, index providers held back from including China’s domestic bond market due to barriers to entry for foreign investors.
As a result, tools that help align the nation's bond market with other developed debt markets are increasingly in demand. Offshore participants have also experienced differences — one of these being the prevalence of manual workflows in China, evident in the slower responses to the RFQ process relative to other major government bond markets in Asia.
“Treasuries can be traded within seconds compared to Chinese bonds, where it can take up to two or three minutes while the investor waits for dealers to come back with a price,” Ischi said.
A larger quote-response-time spread between different liquidity providers often exists despite broad improvements to the average time it takes to receive a quote. Meanwhile, Ischi noted that the RFQ response time was a “work in progress and has already improved significantly since the launch”.
Automated execution makes a difference by freeing up offshore traders from the often laborious and time-consuming process of monitoring when trades are executed and confirmed, which is a requirement when trading Chinese bonds. Automated trading also cuts down on the potential for incurring frictional costs when trades are not executed within an expected timeframe.
Realising the value of automation
For the large European asset management firm mentioned earlier, the gains in efficiency when its fixed income desk adopted Tradeweb’s AiEX tool meant its traders could dedicate more time to transactions that require high-level skills and expertise. As Tradeweb has seen around the world, improvements at the market participant level also contribute to improvements in overall market quality over time, by fully realising the straight-through-processing (STP) benefits electronic trading can deliver.
Across Asia, according to data compiled by the International Capital Market Association (ICMA), bond issuance growth exploded in the decade prior to the Covid-19 pandemic. Trading desks have needed to find ways to deal with the larger volumes more efficiently.
As a result, large asset managers — including long-only, real-money firms, and ETF providers — have largely embraced automation, similar to the largest “tier 1” and local specialist hedge funds, as well as some sovereign wealth funds in the region, according to Ischi.
Hedge funds trading interest rate swaps, for example, are keen users of AiEX for executing their systematic strategies. This materialised after realising systematic trade execution, and not just trade generation, can give them an edge, Ischi said. Such institutions historically transact a large number of tickets and can benefit from the quick execution process.
Hedge funds of all scales and sizes have shown heightened interest in automation this year and remain an important area of growth for Tradeweb going forward, he said.
Sovereign wealth funds are emerging as surprise adopters of automated execution
An increasing number of sovereign wealth funds are also looking to automated execution in their day-to-day strategies, typically setting up relatively fewer and larger-size tickets. Each fund tends to tailor its automation parameters to suit its particular strategy or style of trading, Ischi said.
Perhaps an unusual feature in this corner of the financial innovation landscape is that Asia is the region that currently leads the world in terms of adoption by using automation to trade during the night, when traders are not in the office.
Far from being a box-checking exercise to align with global counterparts, Asia-based clients have been ahead of the curve, incorporating AiEX into everything: from automated compression trading to setting up time-release orders for Chinese bonds.
After all, investors want to “spend the majority of their time on finding the right trade, not necessary on the execution process,” Ischi said.