Validating systematic fixed income strategies with the right data

Data is a key prerequisite to creating and running systematic strategies. Without data, the strategy cannot build or subsequently respect a rules-based structure. Reflecting on traditional systematic trading products, each one typically has robust and available data which, in several cases, is drawn from trading exchanges and then applied to the strategy. This availability of data, alongside the respective market’s trading structure, has meant that systematic strategies have remained relatively nascent in fixed income credit. However, recently this has changed as fixed income electronic platforms have enriched existing data sets and built sophisticated data tools – tools which mean systematic strategies can prosper in fixed income.

The fixed income credit market does not yet possess trading exchanges like those in the equity markets. Instead it relies heavily on voice execution and, increasingly, electronic trading systems, like MarketAxess. Estimates from Greenwich Associates, the independent research group, show that electronic trading in US credit is now approximately 30% of market volume, up from 20% a year ago. This shift in execution structure means that bond trading venues possess an increasingly valuable data set from which they can build more sophisticated and insightful tools. In addition, the same trading venues have built tools that enrichen data available as a result of regulatory rules, such as TRACE in the US. It is the combination of these tools which creates data sets which have not previously been available in fixed income credit. In turn this has created an opportunity for firms to use the data to build and run systematic investment strategies.

Leveraging a consultative approach together with the expertise of our data scientists, MarketAxess has worked with several clients looking to confirm the potential opportunity for a systematic fixed income credit strategy. For example, MarketAxess can combine the historical data available within MarketAxess’ AI-powered pricing engine Composite+™ alongside enriched TRACE data to create a more compelling picture of prior market activity alongside predictive pricing indicators. This type of data availability and analysis is giving funds unique inputs allowing them to assess the opportunity across sectors, industries and even individual bonds. With hundreds of thousands of individual bonds available in the credit market, it’s hard to know which will maximise your strategy, hence why collaborating with clients is so crucial to find success. Assuming such data validates the opportunity, the same data can in turn be consumed and employed for the live strategy via API, FTP or through MarketAxess’ Excel add-in.

Data allows systematic funds to see through the fog, establishing the validity and viability of the strategy. The same data then allows assessment of live market opportunities, framed within the rules of the strategy. It is the enrichment of existing data by vendors alongside the construction and development of their own bespoke solutions which has helped fill data gaps left as a result of different regulatory regimes or comparably opaque market trading dynamics and data capture. These continued improvements in data leave fixed income systematic credit strategies with cleaner, clearer signals upon which to execute. 

For more information, please contact the author: MCallaghan@marketaxess.com