Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client Login
Asset Servicing | May 3, 2024

Shining a Spotlight on the Fixed Income Trading Desk

After the Federal Reserve kept interest rates near 0% for almost a decade, the focus on fixed income is at levels not seen since the global financial crisis of 2008. Currently, fixed income markets are offering desirable yields and better downside protection amid continued economic challenges. Real and nominal yields have risen, and asset allocators are taking note: in an institutional investor survey conducted by BlackRock, four in five respondents said they are making, or plan to make, changes to their fixed income positions, increasing both tactical and strategic allocations.[1]

With increased focus comes higher volumes, driving managers to seek efficiency gains that provide better access to multiple fixed income asset classes. This drive towards enhanced operating models has encouraged them to consider either replacing or supplementing their current trading set up. For managers that lack access to certain fixed income asset classes, such as investment grade and high yield credit, mortgage-backed securities, municipals, or emerging market debt, outsourcing is a way to quickly ramp up capability.

Fixed Income Managers Search for Better Trading Capabilities

With a changing investment landscape and markets becoming increasingly efficient, it is vital for managers to maintain their edge in uncovering relative value opportunities. The more successful teams rely upon skilled fixed income traders with expertise and advanced technology to reach multiple fixed income sectors quickly and efficiently. However, most asset managers with less than $50B AUM do not have a dedicated fixed income trading desk. Rather, many rely on their portfolio managers (PMs) to select bonds and execute their own trades. There are key reasons why firms may want to look more closely at their trading strategies, including to gain the scale, expertise and governance that larger asset managers already leverage.

Economies of Scale

Trading is a scale business, so having access to a vast network of trading experts, 24/6 trading desk coverage and best-in-class trading venues and technology is vital. A scaled trading desk provides investment teams access to many fixed income asset classes and the ability to execute in multiple markets and regions. This scale can help managers obtain global market liquidity as well as better access to brokers. While a manager may maintain a limited number of broker relationships on their own, a scaled trading desk can offer access to a significant roster of counterparties, globally. As many bonds still trade by appointment, a wider network of execution destinations increases the likelihood of obtaining a better bid or offer and more favorable terms in fixed income transactions. Additionally, leveraging a scaled trading desk with a single point of contact can make it easier to manage more broker relationships, lessening the burden on PMs.

Furthermore, with scale comes advanced technology and infrastructure, enabling better market analysis and contributing to increased efficiency and decision-making. Managers that lack this larger scale capability should re-evaluate their models and consider trading options that provide better market coverage with access to high performance systems and data analytics tools.

Leveraging Expertise

Increased scale not only expands trading operations, it also brings a depth of expertise that managers need to analyze the markets. Understanding how to effectively utilize resources and optimize processes is what makes designated fixed income traders so valuable. For example, during the pricing process, a designated fixed income trader is better equipped to set an accurate price that aligns with current market trends. With their exclusive focus on the trading function, fixed income traders continuously monitor market flows and are knowledgeable of key counterparties and market makers. This deep expertise enables the trading desk to navigate a broader range of fixed income asset classes, helping to increase efficiency.

Another important consideration is the ability to apply the most optimal trading strategy to each situation. For example, a PM that does their own trading may overuse a certain trading strategy because it is the one with which they have the most familiarity. And when trading electronically, the Request for Quote (RFQ) process works for highly liquid names but doesn’t work as well for thinly traded or sensitive orders, such as high yield or emerging markets trades. In another example, “showing your hand" to the marketplace can have adverse effects on execution quality. Dark pool trading is useful to execute orders without disclosing intentions to the entire market and allows the trader to match with the other side of the trade at a specified level. By leveraging the best trading strategy for the order, a PM can expand the portfolio’s potential returns.   

Improved Governance and Compliance

Yet another crucial aspect for managers to consider is the importance of governance and compliance measures. In the equity markets it is generally accepted as good governance to bifurcate the trading and investment decision-making process. However, that separation of duties is frequently not the case for fixed income investment managers, where many fulfill both roles. Having a PM as the designated fixed income trader can compromise the integrity of investment and trading processes and create compliance concerns. Since portfolio managers are responsible for making investment decisions, a potential conflict of interest may arise if they also execute those decisions (a practice which has been regulated in Europe with MiFID II). Combining investment and execution decisions has the potential to impact the impartiality of the trades. As a result, it is good governance for the manager and trader to be kept as two separate functions, implementing necessary checks and balances. Separation of duties also helps reduce key person dependency and the associated risks that come with it, and an execution specialist provides additional expertise to find the best bids and offers in partnership with the PM.

Outsourced Fixed Income Trading Gaining Traction

Outsourcing the fixed income trading desk, while a relatively new concept, is beginning to gain traction amongst asset managers looking to supplement or replace their trading functions. According to a 2022 Northern Trust survey of asset management firm leaders with AUM of $500 billion and below, 60% of respondents said they are more likely to outsource an area of their business.[2] As fixed income volumes grow, outsourcing allows managers to leverage specialized expertise, scale and advanced technology.

Collaborating with an outsourced service provider increases operational efficiencies and brings a heightened level of expertise and governance to the trading function. It can also help investment firms improve their access to market liquidity and brokers. Additionally, outsourcing the trading function can enhance a firm's governance and compliance, creating a separation of duties between investment manager and trader. It enables investment teams to focus on the value components of their operating models while leveraging greater scale and expertise in the trading function.

 

[1] Fixed income survey – Institutional | BlackRock

[2] Driving Growth in Asset Management: The Next Chapter (northerntrust.com)

Meet The Experts

  • Check
    Navigate to Stephanie Farrell

    Stephanie Farrell

    Head of Integrated Trading Solutions, Americas

  • Check
    Navigate to Dan Hines

    Dan Hines

    Senior Fixed Income Trader, Integrated Trading Solutions, EMEA

  • Check
    Navigate to Ryan Forberg

    Ryan Forberg

    Senior Fixed Income Trader, Integrated Trading Solutions

    IMPORTANT INFORMATION AND DISCLOSURES – MARKETING COMMUNICATIONS:

    © 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation.

    Northern Trust Banking & Markets is comprised of a number of Northern Trust entities that provide trading and execution services on behalf of institutional clients, including foreign exchange, institutional brokerage, securities finance and transition management services. Foreign exchange, securities finance and transition management services are provided by The Northern Trust Company (TNTC) globally, and Northern Trust Global Services SE (NTGS SE) in the European Economic Area (EEA). Institutional Brokerage services including ITS are provided by NTGS SE in the EEA, Northern Trust Securities LLP (NTS LLP) in the rest of EMEA, Northern Trust Securities Australia Pty Ltd (NTSA) in APAC and Northern Trust Securities, Inc. (NTSI) in the United States. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures.

    This communication is issued and approved for distribution in Australia and New Zealand by NTSA, in the United Kingdom by NTS LLP and in the EEA by NTGS SE. Please see below for regulatory status disclosures for Northern Trust’s legal entities. This communication is provided on a confidential basis for the sole benefit of clients and prospective clients of NTSA, NTS LLP or NTGS SE and may not be reproduced, redistributed or transmitted, in whole or in part, without the prior written consent of NTSA, NTS LLP or NTGS SE. Any unauthorised use is strictly prohibited. This communication is directed to clients and prospective clients that are categorised as (i) ‘wholesale clients’ in Australia and/or New Zealand and (ii) as eligible counterparties or professional clients within the meaning of Directive 2014/65/EU on markets in financial instruments (MiFID II), or in the UK, as amended by the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only. NTSA, NTS LLP and NTGS SE do not provide investment services to retail clients.

    This communication is a marketing communication prepared by a member of the NTSA, NTS LLP or NTGS SE Sales or Trading department and is not investment research. The content of this communication has not been prepared by a financial analyst or similar; it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

    This communication is not an offer to engage in transactions in specific financial instruments; does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of individual investors. NTSA and NTS LLP do not engage in proprietary trading, and NTSA, NTS LLP and NTGS SE do not engage in market making in securities or corporate advisory activities. NTSA, NTS LLP and NTGS SE do not hold a proprietary position in any of the financial instruments or issuers referred to in this communication, unless otherwise disclosed.

    This communication may contain investment recommendations within the meaning of Regulation (EU) No 596/2014 on market abuse (MAR), and in the UK, as amended by the Market Abuse (Amendment) (EU Exit) Regulations 2019. For more information about NTS LLP and NTGS SE’s investment recommendations please refer to the author’s MAR link provided in this communication, where applicable.

    CONFIDENTIALITY NOTICE: This communication is confidential, may be privileged and is meant only for the intended recipient. If you are not the intended recipient, please notify the sender ASAP and delete this message from your system.

    PRIVACY NOTICE: Please read our privacy notice at northerntrust.com/privacy-policy to learn about how we use the personal information you may provide and the rights you have in relation to it.

    ABOUT NTS LLP: NTS LLP is registered in England & Wales under number OC324323; registered office: 50 Bank Street, Canary Wharf, London E14 5NT; authorised and regulated by the Financial Conduct Authority; member of the London Stock Exchange.

    ABOUT NTSA: NTSA is registered in Australia (ABN 79 648 476 055); registered address: Level 12, 120 Collins Street, Melbourne, VIC 3000, Australia; place of business address: Level 40, 225 George Street, Sydney, NSW 2000, Australia. NTSA holds an Australian Financial Services License (No. 529894) and is authorised and regulated by the Australian Securities & Investments Commission.

    ABOUT NTGS SE: NTGS SE is registered in Luxembourg under number B232281. Registered office: 10, rue du Château d’Eau, L-3364 Leudelange, Grand-Duchy of Luxembourg. Northern Trust Global Services SE is an authorised credit institution in Luxembourg under Chapter 1 of Part 1 of the Luxembourg law of 5 April 1993 on the financial sector. It is authorised by the European Central Bank (ECB) and subject to the prudential supervision of the ECB and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). NTGS SE, UK Branch: UK office is at 50 Bank Street, Canary Wharf, London E14 5NT. Authorised and regulated by the European Central Bank and Luxembourg Commission de Surveillance du Secteur Financier. Authorised by the Prudential Regulation Authority and with deemed variation of permission. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.

    NOTICE TO U.S. INVESTORS: NTS LLP and NTGS SE are not U.S. registered brokers or dealers, and they are not registered with the Securities and Exchange Commission or members of FINRA. This communication is intended only for “major U.S. institutional investors” and is not intended for individual or noninstitutional investors and should not be distributed to any such individuals or entities. Interested "major U.S. institutional investors" should contact Northern Trust Securities, Inc. (NTSI), our U.S. registered broker-dealer affiliate, or another U.S.-registered broker-dealer, to effect transactions in any securities discussed herein. Northern Trust Securities, Inc. (NTSI), Member FINRA, SIPC and a subsidiary of Northern Trust Corporation. Products and services offered through NTSI are not FDIC insured, not guaranteed by any bank, and are subject to investment risk including loss of principal amount invested. NTSI does not accept time sensitive, action-oriented messages or securities transaction orders, including purchase and/or sell instructions, via e-mail. Additional disclosures are included in the link, see northerntrust.com/ntsidisclosure.