(The following article first appeared on The DESK, a Markets Media Group publication.)
Traders were empowered by electronic execution in the sell-off thanks to market innovation. The DESK speaks to Graham Cox and Nicolas Masso, Global Co-Heads of UBS Bond Port.
How did traders use UBS Bond Port in April 2020, one of the most challenging months on record?
Masso: In April we had a leading position in the distribution of USD corporate bonds by both ticket count and volume on Bloomberg*. Over 50% of UBS Bond Port’s liquidity comes directly from pure real money accounts resting their inventory on the order book in 2020.
What has driven that?
Masso: We have become counter cyclical. When the market has dislocations, people look for safe havens to find liquidity, giving them the opportunity to make prices and create their own market. While our volumes have seen significant increases year-over-year, the most interesting change has been in the behavioural patterns of some of our market participants. Historically, there were a handful of active buy side participants willing to rest passive liquidity, stepping into the UBS Bond Port distribution, and executing their orders that way. Today, the vast majority of our top global buy-side clients have become price makers and provide resting orders on the platform.
Cox: The lack of price dissemination on screens in the last couple of months has been a major issue for the buy side. Our screens, however, are fully firm, which has been incredibly valuable with the market under pressure. UBS Bond Port quotes around 35,000 unique CUSIPS across 19 currencies and aggregates over 100,000 resting client orders a day for a total value of US$15 billion of executable liquidity. As Nico mentioned, we have seen the behaviour of the traditional buy side evolve considerably. They are looking at their execution functions more progressively and more holistically to optimise that aspect of their business. Outperformance during aggressive downturns in the market is where we have been strong historically.
What does that mean for dealers?
Masso: The buy side have become the dealers to some extent. Big alternative liquidity providers, the ETF players and the quants, ramped up their trading books over the last few years. The major players then became broker dealers. In addition, big inventory holders experienced an urgency to de-risk their books in Q1, inverting the traditional roles in the market.
How did the problem around price formation help you?
Cox: Clients appreciate that dealers have to work orders, but don’t like the lack of transparency. Sometimes, we may see high revenue opportunities on the desk but we ultimately always transact at a fixed, pre-set mark-up and this is exactly the reason why people come back to UBS Bond Port. We are a network, exclusively focussed on electronic trading to provide scale and global distribution.
Where does UBS Bond Port sit in the universe of tools and platforms?
Masso: We are a network. We are platform agnostic. We do not force clients to use our screens to trade. Our data shows strong growth in platform usage over the last year or so, reinforcing the power of UBS Bond Port. For example, in April 2020 we had over 5,700 unique individuals trading on the platform, up from about 2,300 in January 2019. Further, these individuals are coming from 65 countries. We have achieved this global network because we are integrated with many major order management systems and electronic communication networks (ECNs). We connect the dots.
To that point, how has regional activity been?
Masso: UBS Bond Port can bridge the liquidity gap between distinct areas of the globe, with time zones that might not have overlap. We allow you to trade overnight flow on a truly global distribution scale. We have seen passive liquidity provided by Asia Pacific (APAC) asset managers increase 52% per cent year-on-year. Allowing an APAC asset manager to directly access liquidity being traded by a mid-tier asset manager in the mid-west of the United States for example, only happens through UBS Bond Port.
Cox: It’s all about mutually beneficial relationships. Globally, buy-side participants are now the largest client segment by volume executed, followed by global wealth managers.
What are you are doing within UBS Bond Port to drive that growth?
Cox: We allow clients to place an order with a transparent, fully disclosed mark-up spread into the UBS Bond Port order book. A very efficient smart order router scans global liquidity against that order and routes it for execution to the markets or venues that will fulfil the liquidity need of the client.
Masso: The strategy of UBS Bond Port has not fundamentally changed since we launched the business ten years ago. We remain very focused on bringing together all types of market participants to interact seamlessly in a global order book across multiple assets.
Back in 2011 it was our firm belief that the electronification of markets would accelerate over the next decade. This has come true, yet as we look ahead to the next ten years we find we are just scraping the surface in terms of the power of the UBS Bond Port network and what we can achieve for our clients.
*Source: Bloomberg MISX Dealer Rankings Report for USD Credit
