Blockbusting Part 1 | Pre-Trade intelligence and understanding market depth
This is the first in a short series of AxessPoints that will explore the benefits of trading larger block sizes electronically, and how our tools and protocols are being developed to help optimize execution regardless of size, side, and timing.
Tradability: An AI-powered liquidity gauge
Understanding the current depth of market on a given bond at a given point in time is fundamental to the decision making around execution method and timing. It helps the trader to better gauge the effort required (low touch / high touch) and the likely best outcome in all market conditions. Tradability, launched earlier this year, provides a unique, real-time measure of market depth for US credit, Euro, and sterling bonds on the MarketAxess platform. It generates a pre-trade prediction of the expected number of disclosed and anonymous RFQ responses to a given inquiry as a function of the bond, side, and size. Based on extensive proprietary trading platform and historical response data, it adapts quickly to changing market conditions throughout the trading day. The Tradability score can also be used as a guide to likely transaction cost outcomes, versus the CP+™ Mid. The table below explains this in more detail.
We tracked performance metrics for US Investment Grade (IG) inquiries in Q2 2023 based on the size of the order and the Tradability scores for those orders. As you can see, volume-weighted hit rates per inquiry increase from a range of 48% - 52% to 77% - 81% for all sized trades as the Tradability score increases to 5 or more. The percentage of trades executed at or better than CP+ mid also increases by around 8% for all sizes.
As you can also clearly see, even in larger block sizes, RFQ liquidity (number of responses back) is high when tradability scores are 5+. Further 2022 analysis conducted separately by us has also shown that even as volatility increases and CP+ bid/ask spreads widen, the average number of firm prices back for larger RFQ (>5mm) blocks remains consistently high (5+). This is, of course, in part driven by the availability of the Open Trading® all-to-all liquidity pool.
Improving certainty of execution
Today, Tradability is built into our CP+ price discovery toolkit and is available for all users across both US Credit and our Euro / Sterling products.
What’s exciting for US clients, however, is the integration and expansion of Tradability within our new user interface, currently being rolled out in the US and specific to US credit (for now). This builds Tradability directly into every line item, list, and portfolio trade, with associated recommendations for workflow allocation based on each tradability score. This allows traders to better understand, at both individual bond level and aggregated list or portfolio trade basket level, the likelihood of execution and the impact of current market depth on TCA.
Information leakage – challenges for trading larger sizes
While Tradability does not directly address the challenge of information leakage while trading larger sizes, what it does do is help traders better understand how and where to best execute their orders, at all sizes, and therefore to optimize trading performance in both typical and volatile market conditions.
To find out more about Tradability and our pre-trade analytics tools, or to get more information on the development of our new trading workflow and execution tools, please contact research@marketaxess.com