Dwayne Middleton is head of US fixed income trading at Morgan Stanley Investment Management (MSIM), since joining in 2009. He handles trading for separately managed accounts and funds across instruments and leads sell-side interaction to represent MSIM clients’ interests. Prior to joining MSIM he had worked at JP Morgan Asset Management as head of US Investment Grade Credit Strategy and as a senior portfolio manager. He has a BA in economics from the University of Maryland.
What changes do buy-side desks need to make and what assistance do they need?
Dwayne Middleton: Everything falls back to being proactive and thoughtful around the risk in the markets. A connected desktop helps us perform our roles better. As traders, we need to determine which trading protocol helps us to achieve the best client outcome. The trading desk routinely has to play defence and offence throughout the course of a trading day. As members of the investment team, a key role we have is to provide market intelligence to meet portfolio managers’ investment directives. We share liquidity views with portfolio managers and research analysts to assist them in making their ideas impactful. The desk plays a role in mitigating portfolio risk. We optimise trading protocols to reduce information leakage. Traders are often viewed as owners of the trade lifecycle, so we need to ensure that our operations and compliance teams are on the same page to make the workflow optimal. Interconnected applications help us with all of these daily functions. It’s imperative that a trader is viewed as a decision maker internally and externally to capture discrete liquidity opportunities that arise. When we are shown those opportunities, trading has to have the capability and tools to be proactive.
Which of the new generation of platforms is actually impacting the market beyond the hype?
Our mindset shifted to solving workflow bottlenecks and improving our insight on which protocols work best for given situations. The leading platforms, plus a few new entrants, gained more traction by understanding the underlying workflow issues and bringing efficiency solutions to the desktop. We have seen the expansion of all-to-all trading. We have benefited and improved our processes the most with platforms where dealers are involved as well. I’m encouraged by the increasing data science initiatives by a number of platforms. Vendors have developed pricing algos that frame a composite valuation that has been beneficial for pre-trade price discovery. We have captured full straight-through-processing from this pricing by trading lists of smaller notional size trades using constraints around these composite prices. These lists could be 50+ line items that historically have taken up a lot time on the buy-side trading desk. The growth of dealer pricing algos has also improved the process of sourcing executable levels on a wider range of bonds. Trade sizes less than US$2 million notional, for investment grade bonds, are priced by dealer algos more frequently.
How significant is that?
The elimination of inefficient processes is a game changer for the buy-side trading desk. As a team, we are dedicated to freeing up our time to focus on more value-added trades. The follow-on effect is leading to efficiency in other areas. We are in an exciting time for the fixed income market with the growing interest in, and usage of, macro portfolio trading products. These instruments comprised of exchange-traded funds (ETFs), total return swaps and credit default (CDS and CDX) swaps are vehicles to manage market exposure. The interconnection of the ETF ecosystem with the traditional market making business of the dealers has led to an efficient way for the buy side to transfer beta risk or even design specific alpha baskets of bonds through portfolio trading. This has presented opportunities for us to add value for clients by getting our targeted risk exposure in a defined time period with price visibility from different pools of liquidity.
Are there any initiatives that the buy side should be pushing for?
We are working towards an objective to have our desktop applications have a seamless integration. On the efficiency aspect, we are trying to remove a lot of the non-productive tasks that had fallen to trading over time. There is an open source initiative that is addressing these issues, the Fintech Open Source Foundation, FINOS.org. OpenFin, the operating system of finance, contributed the Connectivity and Collaboration Consortium, FDC3 to that initiative. We have a number of external apps running on the OpenFin OS. The growing adoption of this open source architecture by the broader fixed income community is a positive signal for making technology resources more efficient in use and cost.