Barclays Research Finds Significant Cost Savings in Corporate Bond Portfolio Trading
June 08 2022 - 2:30PM
Business Wire
A popular new trading strategy that involves bundling and
pricing corporate bonds in baskets is helping investors reduce
their execution costs by a meaningful amount, according to a novel
study by Barclays Research that explains the exponential growth in
Portfolio Trading.
Portfolio Trades incurred transaction costs that were more than
40% below the transaction costs of trades executed via the standard
request-for-quote (RFQ) protocol, the research found. This is the
first study to use a comprehensive set of Portfolio Trades to
compute cost savings and analyze why this trading protocol works so
well.
“Our findings suggest that Portfolio Trading is remarkably
effective,” said Jeff Meli, Global Head of Research at Barclays.
“Portfolio Trading benefits from spill-overs from the ETF
ecosystem, which drive down transaction costs. In investment grade,
ETFs allow investors to crowd-source liquidity in illiquid bonds
included in portfolio trades; whereas in high yield, where the ease
of hedging is an important driver of execution costs, ETFs offer an
efficient outlet to manage and hedge risk.”
Portfolio Trading involves trading a basket of bonds as a single
piece of risk and transacting the entire basket with one dealer.
The strategy has grown rapidly, accounting for 8% of market-wide
TRACE volume, up from virtually zero in 2018. This rise tracks
growth in the adjacent ETF market, which Barclays sees as a primary
catalyst for Portfolio Trading’s emergence. Inquiries on Barclays’
trading desk have mirrored the industrywide growth, reaching
approximately $175 billion in 2021, up from zero in 2018.
Trading desk data was a key part of the underlying analysis, and
was used to develop a machine-learning algorithm capable of
identifying Portfolio Trades in TRACE.
“With the consolidation we are seeing on the buy-side, as well
as the further push to electronify the credit markets, we expect
Portfolio Trading to continue to be an important strategy for
investors,” said Yoni Gorelov, Co-Head of U.S. Credit Trading at
Barclays.
Part I of the study, published in May, measured the size of the
market, and drew conclusions about how and why investors are
constructing portfolios. Part II analyzes execution costs and
assesses the drivers of cost efficiencies in different parts of the
corporate bond market. A third part, which will discuss optimal
portfolio construction strategies, will be released in the near
future.
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Matt Scully Barclays 212.526.7844
matthew.scully@barclays.com
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