Barclays Research Finds Significant Cost Savings in Corporate Bond Portfolio Trading
BY Business Wire | CORPORATE | 06/08/22 02:30 PM EDTNEW YORK--(BUSINESS WIRE)-- A popular new trading strategy that involves bundling and pricing corporate bonds in baskets is helping investors reduce their execution costs by a meaningful amount, according to a novel study by Barclays Research that explains the exponential growth in Portfolio Trading.
Portfolio Trades incurred transaction costs that were more than 40% below the transaction costs of trades executed via the standard request-for-quote (RFQ) protocol, the research found. This is the first study to use a comprehensive set of Portfolio Trades to compute cost savings and analyze why this trading protocol works so well.
?Our findings suggest that Portfolio Trading is remarkably effective,? said Jeff Meli, Global Head of Research at Barclays
Portfolio Trading involves trading a basket of bonds as a single piece of risk and transacting the entire basket with one dealer. The strategy has grown rapidly, accounting for 8% of market-wide TRACE volume, up from virtually zero in 2018. This rise tracks growth in the adjacent ETF market, which Barclays
Trading desk data was a key part of the underlying analysis, and was used to develop a machine-learning algorithm capable of identifying Portfolio Trades in TRACE.
?With the consolidation we are seeing on the buy-side, as well as the further push to electronify the credit markets, we expect Portfolio Trading to continue to be an important strategy for investors,? said Yoni Gorelov, Co-Head of U.S. Credit Trading at Barclays
Part I of the study, published in May, measured the size of the market, and drew conclusions about how and why investors are constructing portfolios. Part II analyzes execution costs and assesses the drivers of cost efficiencies in different parts of the corporate bond market. A third part, which will discuss optimal portfolio construction strategies, will be released in the near future.
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Source: Barclays Research