Why systematic strategies are the next big thing in fixed income

Fixed income credit investment and trading has changed substantially over the past decade and a half with recent changes leading to the increased viability of systematic strategies. The global financial crisis and subsequent events have irreversibly changed fixed income market structure giving rise to increased automation, as well as a growth in alternative liquidity providers and electronic trading venues.

The way in which investors seek to allocate capital has also evolved, as have the strategies they favour and the returns they expect. This has been most evident in the ‘rise of passive’ credit investment, as well as the growing penetration and assets-under-management of ETF asset managers. However, a strategy previously reserved for other asset classes has recently started to make greater inroads in fixed income credit – Systematic.

Systematic investing has become more applicable to fixed income credit precisely as a result of the market structure changes taking place. Through the growth of alternative liquidity providers – and, vitally, because electronic platforms can now connect end-investors to that alternative and/or natural liquidity – fixed income systematic credit strategies now have a higher likelihood of execution when signals are received. In essence, systematic trading strategies can realistically be employed and the signals won’t be wasted.

MarketAxess Open Trading™, the anonymous all-to-all trading marketplace, plays a key role here as the market leader in connecting end-investors to natural and alternative liquidity sources, which they would not otherwise be able to access. Open Trading is uniquely placed to assist systematic strategies with asset sourcing (or offloading) and the subsequent alpha capture/defence within this new market structure.

Alongside this developing execution landscape, markedly better-quality data is helping to improve signal generation and accuracy. The improved quality and cleanliness of the data assists in validating the applicability and profitability of prospective systematic strategies and, once launched, the same data allows those strategies to identify live and relevant signals and act accordingly. Choosing the ‘right’ data is important – not all data is of equal applicability, especially in markets where regulatory reporting requirements differ. In this regard, MarketAxess Data Solutions via Trax and its multi-market predictive composite pricing tool, Composite+, (which provides over 30 million levels per day), provides data through which signals can be deciphered.

Contrary to some suspicions, systematic fixed income investment does not always seek to eradicate the role of ‘humans’ from the investment process – rather it seeks to apply human input where its value is most keenly felt. Although substantial changes have occurred, fixed income credit remains relatively illiquid when set against standard commodity trading advisor (CTA) trading products, underlining the requirement for some level of human involvement.

Equally, the strategies are not black-box, mysterious operations. Without devaluing the complexity involved, particularly with regards the construction of the machines, the machine processes must be simple to the extent that they can be explained. However, what is undoubtedly true is that as the global investment landscape keeps evolving and potentially becomes yet more complex, the foundations are laid for fixed income systematic credit strategies to prosper.

For questions or follow-up, get in touch with Max at mcallaghan@marketaxess.com