Please describe your role and responsibilities within Candriam today.
I have two responsibility areas within my trading role at Candriam. I am both a generalist on global FICC & Equity derivatives as well as a specialist trading Emerging Markets Fixed Income (Credit, Rate, FX, derivatives).
While it would appear impossible for a human trader to cover such a wide spectrum, technology improvements have allowed our desk to automate trading of liquid instruments in small sizes efficiently so we as traders can maintain a strong focus on our areas of expertise.
Firstly, it’s important to note that (1) we are not only price takers and (2) price discovery is more complex in fixed-income than in equities. Price making in fixed-income is more about how you approach your flow (pre-trade checks) than a process in itself. Our challenge is to have the best possible idea of where a block can be executed before even asking the street. For example, asking for an offer in €10 million on an illiquid bond will shift the bid-offer away from you. Therefore, you need to find ways to reduce information leakage and market noise to the strict minimum.
This in-depth understanding and approach to address market impact also helps your desk automation, as high touch processes end up feeding low touch processes but that’s another story.
Once you have an idea of the feasibility of an order, then you can build a negotiation strategy with all available tools to get the best outcome. A simplistic approach to RFQ only is not always sufficient to achieve best execution. RFQ (electronic or voice), buy-side to buy-side tools, use of an agency broker are just various options for you to achieve your objectives, depending on the type of instrument, the order size and market conditions. There is no clear one size fits all process as markets are in constant evolution.
At Candriam, we employ different execution methods with the constant aim of lowering transaction costs.
There is also a clear difference between making a price as a market maker and making a price as a buy-side trader. As a market maker, it’s ok to miss a trade if it does not fit your book. You also have to give a continuous price service to your clients. As a buy-side trader, you have to trade. It’s not about knowing the bid offer context, but where the parties can meet to achieve the best return for the fund.
For which asset classes and types have you developed these approaches today?
In terms of asset classes, of course a price making process does lend itself to illiquid assets such as high yield, emerging market debt or convertible bonds. The method can be applied to any “blockable” situation. Each buy-side trader should be able to assess its own price impact and if the quote received by a market maker is acceptable or too defensive. All of it without waking up the whole market.
In which situations and context would buy-side price making be applicable?
Firm price making, when you intend to rest an order, is based on a few conditions:
Low liquidity and a decent size to buy/sell.
A decent market picture, having a good idea of where the price context lies.
A good relationship with your portfolio manager to establish the time frame to fill the order.
There are two ways to look at it and I believe the level of urgency of a trade is key. In negotiation textbooks, ‘time’ is an important asset to hold when you want to explore alternative ways to achieve a better outcome. But the main considerations are:
If the order has a high urgency and you can execute at a decent price (following your best execution process of course), then try to trade!
If the order is urgent but you believe 100% that you can get hit/lifted at a better price in a short period without losing the quote received, then try to get an improvement by giving your target. It never hurts to have a discussion.
In low urgency situations with stable & illiquid markets, try to reduce the market noise. It can be better to work such orders with a reputable sales/broker representative to tap potential natural buy-side players. Alternatively, you can submit an indication of interest to a buy-side to buy-side crossing system that gives you access anonymously to more liquidity. Obviously, the link with the portfolio management team needs to be constant in those situations. Leaving a price is an active matter, as you constantly need to monitor and adjust it to market conditions.
As a trader, you can reduce the perceived urgency of a trade by providing an adequate market color assessment to your portfolio manager. If you believe the opportunity cost of trading now is bigger than the improvement you can get by taking your time, and the portfolio manager is comfortable with your analysis, then you have the opportunity to generate incremental alpha through your trading. For illiquid markets it is of course tough to quantify the potential impact precisely as you will never know where you can trade in one go. Subsequently there is a risk that you could affect your market for nothing in return as the underlying data for your decisions is lacking. But a qualitative assessment can still be done, as portfolio managers should already know and have noticed that you as a trader are adding value. For example, you might go to the sell side specifying €10 million of a bond to offer at a specific price and check with 1 or 2 competing counterparties just before completion for €1 million to verify that you are achieving best execution.
Which tools (platforms and pricing tools) are needed to make the informed pricing decisions?
You need both pricing tools and execution tools. I am a firm believer that you need to be able to price and understand what you trade. You cannot do your job properly without having a firm grasp of all the inputs that affect the pricing of the asset traded.
The “pricers” do not need to be complex, but you need to be able to explore the various input to assess and decide.
For execution per se, you need good platforms for RFQ or buy-side to buy-side trading. It allows you to gather the most liquidity possible, but let’s face it, a good old IB chat or phone call is quite often the most flexible way to trade in those situations. It is not yet possible to interact as interactively and intelligently with an algo!
Which relationships do you need and what is the required understanding of your counterparties?
Negotiating is the heart of our job. As quantitatively driven one can be, the business and human context has to be taken into account. One cannot interact the same way with each market participant.
First of all, negotiation textbooks tell you that when negotiators appreciate each other, people tend to show greater flexibility when dealing with each other. So, you need to take the human interaction element into consideration. Over the long run, you tend to get better prices by having the best relations with your business partners.
Understanding what are the goals, targets and business models of each counterparty is also key. One cannot approach two counterparties with different goals the same way. Knowing if a bank is in a market share mode or not is valuable.
Trading is also an iterative process, in the sense that the reputation each player builds in this market has an impact on the next trade. In that sense, a desk needs to evaluate its counterparties dynamically, not only according to its own needs, but also in the context of how your broker/dealer aims to achieve its targets. Your desk needs to constantly be wary of reputational damage. Monthly post-trade analysis (PTA) reports are complementary tools for measuring execution quality, observing trends, outliers and outperforming counterparties across all bond segments.
Which knowledge and expertise does a buy side need for price making?
As explained earlier, a trader needs to understand the market and have a view of why things are moving and which direction he thinks it is going. That’s the only way to interact efficiently and quickly in illiquid markets. One needs to be able to move inside the bid offer spread and quickly. There are no shortcuts there. Is it better to pay a bit more for an order or to wait? You need to be able to take informed decisions on the run. This question can only be handled if you have a firm grasp of your market. The quality of execution for illiquid bonds is highly correlated with the in-depth knowledge of these illiquid bonds specificities as well as the counterparties that can have the best reach.
Regarding skills in relationship building. Relations are needed as part of your market intelligence, as mentioned earlier, you need to know what each actor can, cannot do or even what they are willing to do.
Finally, a good grasp of the fund strategies helps, but this is an integral part of the relations you establish with the portfolio manager teams, and a good way to judge and establish the urgency and context of each order.
Can you give a brief summary of your career leading up to your current role at Candriam?
Briefly, I have spent most of my career as a sell-side trader on convertible bonds and equity derivatives. Due to the increasing capital requirements, book sizes reductions and increasing illiquidity, I thought I could leverage my skills on the buy side to improve Candriam execution capabilities on illiquid assets and help build a strong emerging market debt (EMD) trading capacity. That’s basically what I have been busy doing these last 3 years.
Who is Cyril Batkin outside of the workplace?
As geeky as it sounds, I have a deep interest in human sciences so apart from socialising and travelling, I have spent most of my recent time studying political sciences and philosophy. But with a wife in London and a job in Brussels, my greatest passion lately has been the Eurostar!