Portfolio Trading: The next big thing for Asian bond markets?

Maybe. The answer is a little more nuanced.

Asia has seen an acceleration in adoption of electronic trading in the bond market in recent years, but in a dynamic region with volatility and uncertainty often higher than developed markets, the right tools for efficient trading are paramount.

Among these, Portfolio Trading (PT) is gaining popularity as a unique method for maneuvering through these markets. PT is a solution that allows clients to trade a number of bonds simultaneously with one counterparty as a basket. But is it a one-size-fits-all solution?

We discussed this topic during our recent APAC roundtable series called “The Trader’s Table” – a client forum we use to talk about the latest trends in fixed income electronic trading. We hosted two sessions in Hong Kong and Singapore, inviting around 10 buyside clients to each session to discuss benefits, challenges, ask questions, and demystify myths around Portfolio Trading.

Why should you use Portfolio Trading?

With the growing popularity of PTs globally, there is no doubt that there are benefits to trading in this way. However, like any tool, it's most effective when used appropriately. Let’s start with the benefits highlighted during the roundtable discussions:

• Efficiency: PT allows clients to trade a basket of bonds quickly when compared to trading the bonds individually. Where previously PTs were done through complex spreadsheets, with platforms like MarketAxess, clients can trade them with just a few clicks.

• Certainty of execution: By adhering to an 'all or nothing' model, PT eliminates the risk of leftover names that don’t meet requirements to trade, providing certainty of execution.

• Trading less liquid bonds: Investors can potentially get better execution outcomes on less liquid bonds as the basket overall may have a better liquidity profile.

• Minimizing market impact: As opposed to trading a large list of bonds one by one, trading a PT can allow for quick risk movements of a basket of bonds without alerting the market, reducing the likelihood of market impact which in some cases can lead to negative impact on pricing.

• Portfolio rebalancing/ETF creation redemption: PT allows clients to achieve their rebalancing goals quicker, which is especially useful for month-end rebalancing. For example a client can change to the sector weighting of a portfolio without having to buy or sell the bonds line by line.

Is it a one-size-fits-all solution?

Well, no.

For instance, illiquidity in Asia Credit can make it challenging to receive transparent pricing for securities, particularly when the portfolio's securities aren't closely correlated. In such cases, you might consider trading the bonds using a Request-For-Quote List (RFQ List). An RFQ List is when you send out multiple bonds at the same time to ask for quotes, and dealers can price the bonds back individually. A client will then often end up trading with a different dealer for each bond, as opposed to trading the whole basket with 1 dealer when using a PT.

The size and diversity of the portfolio should also be considered. In the roundtable session hosted in Hong Kong, there was consensus that the more diverse the portfolio the better, as it enables the dealer to manage their risk more easily, and therefore provide better pricing. For example, clients can achieve a diverse liquidity profile in the PT by mixing more liquid with less liquid bonds.

Clients can leverage our liquidity analytics such as the MarketAxess Relative Liquidity Score to help decide if they should trade the bonds as a PT or RFQ List, and to help decide what types of bonds to include in the PT. MarketAxess' AI-powered bond pricing tool CP+ can also help clients estimate the value of the portfolio and assist with benchmarking the prices they receive from dealers pre-trade.

RFQ List vs PT

Which protocol fits your execution criteria 

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