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- Amy Hong, Goldman Sachs’ global head of market structure, said clients that don’t have such strict requirements around what types of bonds they’re interested in are likely to get better prices.
- In US corporate bonds, where the availability of a bond can fluctuate greatly, clients would be better off keeping an open mind as opposed to having stringent orders on particular bonds they want, Hong said.
- Chris Concannon, chief operating officer at electronic platform MarketAxess, said a key factor is the relationship between the trader and his or her portfolio manager.
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You order a bottle of Pepsi as part of your takeout order, but you get a Coke instead along with a note explaining the restaurant had run out of the former.
While a few hardcore Pepsi fans might be bothered by the switch, the majority of people would view it as non-issue.
That’s how Amy Hong, Goldman Sachs’ head of market structure, said investors should approach bond trading.
In US corporate bonds, where the availability of a bond can fluctuate greatly, clients would be better off keeping an open mind to the bonds they’re interested in buying or selling, she said. The strategy, known as attributes-based trading, is one Hong said she has personal conviction for.
"As market conditions change, as liquidity evolves, I actually think that it will be really important for the buy side, in particular, to introduce a little bit of flexibility in the liquidity search process," Hong said.
Traditionally, Hong, who was speaking in Philadelphia at the Fixed Income Leaders Summit Wednesday, said clients will come to the bank with a list of bonds they are looking to buy are sell as a result of the portfolio construction done by the portfolio manager.
With attributes-based trading, as opposed to offering a list of specific bonds they’re looking to buy and sell, clients would give banks some work-ability in how they fill their orders.
Doing so allows the bank to take into account the inventory of different bonds, as opposed to just blind buying the ones the client requested.
"Perhaps it is no longer a conversation of, ‘Hey Goldman, I am trying to buy this particular bond,’" Hong said. "It is instead, ‘Hey Goldman, I am looking for a bond with these particular types of attributes.’"
To be clear, dealers stand to benefit from investors being less prescriptive about the bonds they want. The more flexibility they have, the quicker than can move through orders, and potentially unload bonds already on their books.
Hong said some clients are already taking this approach. Particularly when it comes to portfolio trading, or the process of trading a large group of bonds with a single bank, Hong said clients aren’t as concerned about getting specific bonds.
Instead, investors sets some parameters for the bank and let them fill the order where it deems it appropriate.
"Clients might come in and say, ‘Hey, I have these inflows and I am looking to put my capital to work as quickly as possible,’" Hong said. "In which case, we are able to respond and address by helping the client construct what we call real-world portfolios based on the true liquidity that is available as opposed to hypothetical portfolios."
Chris Concannon, chief operating officer at electronic platform MarketAxess who was speaking on stage with Hong, said a key factor is the relationship between the trader and his or her portfolio manager. Some are buying bonds within a specific sector or tenor, also known as time to maturity. However, the amount of choice they have within those areas varies.
"What is going on on the buy side, is there is a separation from PM and trader," Concannon said. "It really depends on the make-up of the trader. How much flexibility does the trader have to switch? And where does that trend line go."
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