BDA Podcast - “Leaning into Disruption – a BDA podcast with Liz Kirby, head of market structure at Tradeweb”

Today, we're happy to welcome Elisabeth Kirby. Elisabeth is managing director and head of market structure at Tradeweb, where she's worked since 2011. Elisabeth oversees strategy and development of electronic trading businesses across fixed income and derivatives markets. Before Tradeweb, Elisabeth worked for four years in investment banking at BNP Paribas. She has degrees from Boston College and LSE.

Elisabeth, thank you for joining us today.

Elisabeth Kirby: Thanks so much, Michael. I'm so happy to be here.

Michael Decker: Tell us about your job at Tradeweb. What do you do every day?

Elisabeth Kirby: My job is head of market structure, and that is a pretty broad remit. And so, I'll kind of break it down into two sort of silos, if you will.

On the one hand, market structure, I really deal with the structure of our platform and the way that participants interact with each other. And so, that could encompass anything from trading protocols to the way that participants actually interact with our platform, whether that's via our screens or via a more automated fashion, as well as the different parts of our market and how they interact with each other.

And then, on the other hand, there's the regulatory aspect. And so, I am the regulatory liaison for most of our U.S. fixed income regulators and the markets. And so, I speak to the official sector and then I also speak on panels and other industry events, about certain elements of regulatory change and how they may impact the wider fixed income markets.

Let's start by talking about SEC rule 15c2-11, one of our highest advocacy priorities. 15c2-11's been in the SEC rule book for 50 years, and all that time it's been a penny stock rule, applied to quotations for over the counter equities. The rule requires a trader, before publishing a quotation to a quotation medium, to review certain issue or financial filings and other issuer information, and ensure that all that information is available publicly. The SEC last year decided that the rule will now apply to fixed income as well. They provided a staff no-action letter for some relief, but many fundamental compliance questions associated with applying the rule to bond quotations remains.

Are there activities that traders might conduct using Tradeweb products or services that would meet the definition of publishing a quotation to a quotation medium in the context of the SEC's new interpretation of rule 15c2-11. And what's your advice for dealers on how to comply with applying the rule to fixed income?

Elisabeth Kirby: Michael, I'm glad you brought this up and this is a very high priority for us as well. Certainly, the market overall was a virtual fever pitch towards the end of last year, as we all struggled to understand what we had to do to comply with this, and whether and when any no action relief or phasing would take place.

Certainly agree with your characterization of the rule overall. And I think it's important to also think about, when we think about this rule, 15c2-11, and how it was an equity construct that's being applied to the fixed income markets, sometimes we kind of take a step back and think about why and what is the benefit. And what's in this instance, the kind of cost benefit analysis to that rule. And as you rightly mentioned, 15c2-11 initially developed to provide protection to retail investors for penny stocks.

I think first of all, we have to just take a step back and realize that in the fixed income market, we're talking about primarily institutional players and institutional client base. And so, when we think about what protections is this rule really offering, it doesn't make that much sense. And the costs for compliance are really substantial when we think about everything that a dealer would have to do in order to ascertain whether issuer information was readily available and audit that information and make sure that it was up to date.

And so, I think we sort of ask ourselves, "Is the benefit or perceived benefit of protection for institutional investors, which I think we all agree don't totally need protecting in this way, worth all of this cost?" And so, that's what we will continue to kind of advocate around on our side. But to answer your question on the topic of the quotation medium, this is really the key definitional term in the rule.

And so, at Tradeweb, we offer a number of different trading protocols, across a number of our different markets. We believe that the protocols offered on our institutional marketplace remain out of scope of this rule. Some protocols that are offered on our Tradeweb Direct platform may be in scope. It's important to note here though, that even for protocols that may be in scope and where protocols may qualify as a quotation medium, U.S. government bonds and munis are still exempt. And so, on our Tradeweb Direct platform, a lot of our volume comes from the muni bond market in particular, as well as govies.

So a meaningful, although certainly not an entire scope of products offered on that platform would be exempt. So we'd really be talking about the corporate bonds subject to that phase in. So we're talking about next year, sort of 144A paper that is transacted on the Tradeweb Direct platform, that may wind up being in scope. So it is a limited subset of the overall kind of market of paper. Also, a limited subset of the protocols offered on our platform that would be in scope.

Michael Decker: Great. Just to let the audience know, as I think most of our members are aware, BDA's been working on an industry-wide initiative to define and scope out key compliance questions related to 15c2-11. So hopefully, that will bear some fruit for members as well.

What are your priorities for Tradeweb fixed income platforms for the rest of '22 and into next year? Are you working on any product enhancements or upgrades that dealers would find interesting? And how do you differentiate yourself from your competitors?

Elisabeth Kirby: It's a great question. There are a lot of great things happening on the Tradeweb side. I'll focus on a couple that I think might be most interesting to this audience.

On the corporate credit side, portfolio trading has been a huge area of growth for us and a huge area of focus. So in 2021, portfolio trading protocol saw 232 billion of volume transacted in portfolio trading. That's nearly double what we saw in 2020. And what we see this year so far, is a continuation of that growth trend. The first quarter of 2022 was a record quarter, and we're doing a lot of work to grow this protocol. We're continuing to increase the number of line items supported, it's now at 2000.

And also to allow for different types of trading. So for example, in March, we rolled out the ability to trade portfolios on spread to reference price. That's something that has resonated really well with our client base.

Another thing that it makes sense to talk about here is the municipal bond market. So the muni market on Tradeweb has seen a lot of growth over the past two years, and we continue to see a lot of growth here. And I think it's particularly worth mentioning in light of current market conditions, which have really highlighted the value proposition that the Tradeweb Direct platform can offer to the marketplace and to the muni liquidity pool.

Thinking about the kind of macro market, there's been a huge backup in rates over the past three months, and we've seen massive outflows from the institutional community, from asset managers, fund managers, et cetera. And so, the dealer community has been increasingly constrained in their ability to absorb all of this. And the retail has become kind of a buyer of last resort.

And so, we've seen our Tradeweb Direct participants really step into the market in a huge way, to provide support and liquidity in a market in which dealers may no longer be warehousing the risk the way that they used to. And so, that diversity of liquidity on that Tradeweb Direct pool for muni bonds has been hugely important and a huge growth driver for us, and I think something that's going to continue driving growth growing forwards.

Which brings me to sort of your final part of your question, in terms of differentiators. Having that retail presence and the diversity of liquidity within our platform is in and of itself a huge differentiator, vis-à-vis the competition, and the other electronic fixed income trading platforms out there. So we continue to focus really strongly on building out that Tradeweb Direct platform and building out the liquidity and the innovation within that Tradeweb Direct platform.

Michael Decker: How have you all done through the pandemic? Were you able to transition seamlessly from office to work at home, and back to office? And what lessons have you learned? And any advice for the rest of us who are still thinking through these issues?

Elisabeth Kirby: Sure. It continues to be topical, because a lot of us are still in some kind of a hybrid kind of work environment. The pandemic forced the marketplace to react and disperse very quickly and all at once. And certainly at Tradeweb, when we think about our own handling of that, it went really, very, very well, honestly. We were able to get our own people and our own systems switched on at home, online, immediately helping clients to navigate the challenges that they were seeing on their end.

And what we saw pretty quickly was that the priorities from our clients evolved too. Because initially, it was just this sort of, can we establish reliable connectivity. Very quickly, it transitioned into something of kind of a new normal, in which clients were looking to access the full suite of pre-trade data, execution protocols, post-trade workflows, and really transition their entire kind of trading workflows to a work from home environment.

And what actually we saw and what the marketplace saw was electronic trading was hugely helpful and advantageous to working in a dispersed environment. When you might have traders and operations people that are used to sitting in the same place, no longer in the same geographical location, no longer in proximity to each other. And so, the importance of accurate electronic trading straight through processing just became more and more obvious in a remote work from home environment.

And one trend that we found very notable was, historically, in periods of volatility, or market stress, we might have seen electronic volumes dip a little bit, and market participants maybe moved back to the phone during those times of volatility and times of market stress. We did not see that at all during the pandemic. We actually had a record month in March 2020, over a trillion notional executed on our platform. We continued to just see kind of electronic trading move from strength to strength, as we navigated through those early days of the pandemic. And then into, as I said, sort of more of a new normal.

So it's been something that I think has really almost reinforced the value proposition of electronic trading as a means of error reduction and operational efficiency, that people are continuing to realize as they move back to the office, it's not moving in the opposite direction. It's continuing through the current situation of rate volatility and some of the geopolitical stuff that we're going through. We continue to see, again, this trend of not backing away from electronic execution and continuing to move more volume onto electronic platforms.

Michael Decker: What's your thought on the general state of the fixed income markets and fixed income trading? You mentioned retail as a growing source of liquidity on some of your platforms. How are liquidity and trading volumes generally? And are you continuing to see a larger share of fixed income trading volume migrate away from voice and towards the platforms?

Elisabeth Kirby: I think there's a lot of conversation right now about liquidity in fixed income markets, and what is the state and the health of fixed income markets. And as sort of just alluded to, there's a lot of stuff happening in the wider world around inflation, quantitative tightening, everything in the geopolitical, Russia, Ukraine space.

And so, what we find actually, is that all those things kind of not withstanding, liquidity remains pretty strong. And so, volume's on the trade, but platform continue to grow. Certainly, we see some differences between different asset classes. So often reflective of wider market activity overall. Certainly in the first quarter of the year, trace credit volumes were depressed and the entire market credit volumes were depressed. That's reflected certainly on electronic platforms as well, but that's coming back a bit.

And then, on the flip side, we continue to see growth in rates and rates derivatives off the back of some of the inflation and rate movements that are happening in the market. So in general, we see liquidity as really maintaining fairly strong, all things considered.

And then, as it pertains to overall electronification, I would say what we see is a continued focus on building scale of e-trading. And so, the platforms and the protocols at this point have been tried and tested almost every way you can think of. And so, clients feel comfortable. They feel comfortable putting increasing volume through platforms and really building that scale.

And so, there are a couple of different tools and ways that we see clients leveraging Tradeweb innovation to do that. One is an increasingly dramatic adoption of automated trading tools. So on the Tradeweb platform, that's known as AiEX, Automated Intelligent Execution. And that allows clients to significantly increase the quantity of tickets they're able to execute at a time, versus manual trading.

As mentioned earlier, we're also seeing incredible growth in portfolio trading, and that allows clients to trade large lists of line items at a time. And this becomes really meaningful when you consider the continued rise of ETFs and the desire to transact the underlying basket of constituents, as well as the desire to continue to transact large numbers of line items at month end.

So in general, we see electronification continue to move kind of like in one direction only. We're not seeing a pullback. We're actually seeing a continued desire to get more things onto electronic platforms, as clients continue to realize the benefits of electronification.

Michael Decker: And why have some segments of fixed income, like institutional municipals, for example, been slower to adopt?

Elisabeth Kirby: It's a great question. And we do see across asset classes, varying degrees of adoption. And it's interesting to me. Tradeweb launched in 1998 as a U.S. Treasury trading platform. And so that's our longest standing and most mature product. And still, we see in the institutional treasury market, it's only sort of 50% electronics. So we find even in the most kind of electronic and mature markets, there's still a way to go, and we view that as a real growth opportunity.

So in the markets that have been slower to electronify, and we think of corporate bonds and certainly the muni market, I think some of it is behavioral and some of it is fine tuning of the tools to address the individual liquidity profile and the way that those markets work.

And so, I think what we are constantly focused on is innovating in such a way that allows those particular market participants within particular asset classes to access liquidity in a way that's better than what they were doing before. And so, we continue to tap into new innovations and new trading protocols that allow our participants to do their business better, or faster, or more efficiently. And I think that will continue to result in continued electronification, even in some of those asset classes that historically have been a little bit slower to adopt.

Michael Decker: T+1 is coming. The SEC has a rule proposal out now. So we know it's officially in the works. Is it too early to start preparing for that? Is Tradeweb doing anything to prepare? When do you think we'll see all of this fully implemented?

Elisabeth Kirby: Well, I always say for any of these things, and I'm hearkening back to even 15c2-11, it's never too early for anybody to start preparing or at least thinking about it. We have started thinking about it. And the market in general has sort of been through this before, in the T+3 to T+2 transition. There is work to be done on the Tradeweb platform. There is work to be done from our participants, from a trading perspective, as well as from an operational perspective. So I think this is one of these things that I think ultimately, it will get done. It might be a little bit painful along the way, but I think everyone will ultimately get to where we need to be to make that transition happen.

Michael Decker: And finally, what are the biggest risks your business is facing and what are your biggest concerns for the fixed income markets generally?

Elisabeth Kirby: In terms of concerns around our business, certainly, we're always focused on liquidity overall, and sort of market health overall. And so. Any kind of market contraction is something that is concerning to us. And something that we're always very focused on is sort of, as I mentioned, preserving our participants' ability to access high quality liquidity, and do that in a way that works for them.

And so, to that end, always kind of pursuing a high degree of optionality, in terms of the ways in which participants can interact with each other on our platforms. But yes, certainly any kind of negative impact on liquidity or market health, whether that comes from sort of organic factors, or from changes perhaps in monetary policy, or the regulatory environment, or something that we're always very focused on.

Regulation in general, kind of coming back to our first topic, in general, we are certainly supporters of appropriate levels of market oversight. And we are always very willing to dialogue with the official sector, as well as with our clients on ways in which we think regulation can be helpful to fix income markets. And I think it's important for everybody to think about when there are pieces of regulation that maybe don't make as much sense for our fixed income markets, that we need to really be kind of thoughtful about how we address those things and how we can communicate in general back to each other and to the official sector around ways in which sometimes things might be approached a little bit differently to better effect. So the regulatory sector is something that we're always very, very focused on.

But in general, I think we're very optimistic and we're very positive about continued trends in electronification. And we're very positive about the solutions that we've been able to offer to our participants, and that we will continue to develop and offer to our participants. So I think in general, certainly yes, there are concerns and there are things that we think about, but overall, our business is moving in a great direction. And we're very pleased with the growth that we've seen in the past, certainly in 2022. We expect that to keep moving in the same direction. So we're excited to keep working with all of our participants and with our listeners here today, to continue to develop new and innovative ways that they can get their business done.

Michael Decker: Well, that is a very optimistic way to end the conversation. Elisabeth, thank you so much for your time and insight today.

Thanks to our audience for listening and watch for the next installment of the BDA’s “Leaning into Disruption” podcast series coming soon.