Wall Street maths rush to wire bond market

For years David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school company where pricing was a call rather than a click.

Sixteen months of pandemic change all that.

The era of working from home fuels a wave of bond e-commerce which gives Horowitz the belief that a long-standing quantitative revolution is finally ready to sweep the debt world.

Long credit positions held by quants have doubled since 2018 according to Man Group data, surpassing 20% ​​growth of other asset managers as systematic players grasp the rapid modernization of the market, as they did for stocks years ago.

“Credit is going through a similar evolution,” said Horowitz, who previously led the pioneering systematic credit team at BlackRock Inc. launch its own fund of $ 290 million. “As we become more electronic, we should expect the same types of forces to come into play.”

Quants have been saying this for years of course, only to see their mathematical models frustrated by the heavy and complex world of debt. The difference now is that they can have a market that is liquid and transparent enough to accommodate their constant churn rate.

Electronic platforms like MarketAxess and TradeWeb accounted for 37% of quality trades and 26% of high yield trades in May, 8 percentage points more than the year before, according to data from the Greenwich Coalition.

This sets up a virtuous circle, where banks deploy more algorithms to value more bonds. Add a year of record flow to credit exchange-traded funds, and a wide range of securities becomes easier to trade – vital for a cohort that typically holds hundreds of positions and trades more often than the average fund.

“This helped answer the question of ‘can we trade this tomorrow? “” said Paul Kamenski, co-head of credit at quantification firm Man Numeric.

Liquidity in the bond market has long been fragmented by its very nature – companies typically issue multiple bonds. This means quants can see their models spit out a dream wallet but have to adjust it based on what can actually be traded, Kamenski said.

“We had to try and do things that were less natural in quantitative strategies,” like trading larger sizes or restoring dealer inventories, he said. “It’s still difficult today, but it has become more manageable.

This doesn’t necessarily mean that the entire market is suddenly very liquid – complaints about the difficulty of unloading large blocks are everywhere.

But it has become easier to move smaller sizes and figure out where each bond is trading, helping to detect signals and lower transaction costs, Horowitz said.

At bank trading desks, Asita Anche of Barclays Plc has seen an increase in the use of algorithms, especially for executing small trades. But she emphasizes that people are still essential in bonds because liquidity is more fragmented than in equities and it is more difficult to manage risk.