Industry Updates

Algorithm trading catalyst for fixed income ETF boom

Shifting more volume on exchange could boost fixed income ETFs

Theo Andrew

WBR-FILS-Barcelona-2023-1169 websize

The rise of algorithm trading in ETFs could act as a catalyst for fixed income ETF growth, industry experts have said.

Speaking at the Fixed Income Leaders Summit in Barcelona earlier this month, Brieuc Louchard, head of capital markets at AXA Investment Managers, said the increasing use of algos could be a positive for the market driving more volume on exchange.

“The increased use of algorithms will bring back volume on the exchange which could generate a positive leverage effect on the growth of fixed income ETFs,” Louchard said. “More volumes on exchange will lead to tighter spreads and increasing retail participation.

“Fixed income ETFs are still predominately trade request-for-quote (RFQ) versus equities but the algorithms, notably the ones based on fair value, are starting to see some positive feedback.”

Traditionally when trading equities, the growth of algorithms using a fair value model when trading ETFs is helping when there is less volume across exchanges.

RFQ platforms dominate ETF trading in Europe and have grown in popularity by enabling buyside traders to interact with multiple liquidity providers to ensure immediacy of execution and competitive pricing.

Andy Dwiar, head of UK, Benelux and Nordic ETF capital markets at Invesco, added: “Using algorithmic trading strategies for fixed income ETFs is not the same as equity ETFs due to the underlying constituents.

"This is due to the underlying bonds being over the counter in nature as well as the majority of ETFs being traded off exchange.”

Elsewhere, the panel touched on the differences when trading active fixed income ETFs versus passives.

Louchard said: “Interestingly enough it does not change anything for the trading. You need strong communication with the authorised participants and market makers, above usual when compared with index-based ETFs.”

AXA IM launched its first fixed income ETF in July, the AXA IM Euro Credit PAB UCITS ETF (AIPE), an active strategy that tracks euro corporate bonds linked to the Paris-Aligned Benchmark (PAB).

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