Episode Transcript
Troy: Historically, people think about this electronification and the velocity of it, but if we go to the US Treasury market, which is widely considered the most liquid of all the fixed income markets, it is still only 54% electronified.
Marina: Hello and welcome to FTSE Russell Convenes. I'm Marina Mets and I'm excited to talk to Troy Dixon, co-head of Global Markets at Tradeweb about fixed income in motion.
Welcome, Troy.
Troy: Thank you for having me.
Marina: Being at FTSE, Russell offers us a fairly unique view into global fixed income, typically from origination, construction and allocation of capital. And what I found incredibly interesting over the last little while is how much closer this idea of benchmark design and then the execution of fixed income is getting.
Obviously all of it enabled and underpinned by the infrastructure that now supports fixed income markets.
In your seat at one of the largest, world's biggest trading venues within Trade web, how do you see that progression, this sheer scale, size and speed of what's happening with the electronification and fixed income?
Troy: Yeah, it's an exciting time. Obviously, I think as we think about the markets and the dynamic nature of the markets, one of the things that we sort of pride ourselves with on a trade web is the transparency that technology brings to the fixed income space. You think back, historically, fixed income has sort of been sort of behind a veil, if you would, relative to the equity markets.
And I think as technology has continued to enhance itself, we've been brought out of the dark ages into a very bright light as people start to understand the wide scope of availability within fixed income and then the transparency around the execution of it and also the transparency around the pricing of that execution. So it's a very dynamic time because we're, I would say we're in inning 3 or 4 of that electronification.
And it's an interesting stat. I'll kind of leave with you, you know, I think historically people think about this electronification and the velocity of it. But if we go to the US Treasury market, which is widely considered the most liquid of all the fixed income markets, it is still only 54% electronified. So sort of a dynamic thing. When I tell people that, they're sort of shocked because they would think that number is more like 75 or 80%.
And so there's a lot of scope for us to continue to kind of foster that transparency around fixed income, not just in treasuries, obviously, but it cost the entire product set. And it's we're working really closely with FTSE around that instead of figuring out the indexing of those products as well.
Marina: The partnership has been fantastic, right? We've obviously created the end the day benchmark pricing together. We've adopted these benchmark prices inside the indices, some of the largest global treasury and sovereign rate exposures that we managed through WGBI.
But what I find actually quite interesting in bringing that infrastructure and that configuration together is as you think about tooling that's available and the adoption of those tooling into institutional investors, bringing kind of index construction closer towards that Executability has been really interesting because it's allowing, at least in our world, next generation of indexing to evolve.
Thinking specifically around what we've seen in the markets in thinking about trading baskets of risk transfer, of course, executability becomes very important, liquidity becomes very important. How are you seeing some of those parameters as large volume goes through the system being adopted by the market today?
Troy: One of the things, the big words that everybody's using, and I know it sounds somewhat trite, but it's trite because it's relevant, is data. And through that data, we're getting better execution, more tangible outcomes.
One of the things we say at Tradeweb is if I can get a technologist, a product person and a salesperson in room with an institutional client, we're going to come out with some very thoughtful solutions to the pain points that our clients are focused on.
And so what we're starting to see is through some of those protocols and through some of the workflows that we've sort of produced, we're producing much more efficient execution. And we can quantify that, which I think I would say even 3 or 4 years ago was much more difficult for us to quantify. We can now put math behind what the execution is saving you both from a dollar and from a workforce standpoint. So that's sort of really exciting for us.
And I think what you're finding is like the indices evolvement is very much touched to the evolvement of the technology and the transparency and the data. And so, we're starting to meld those in a very, very dynamic way, and it's doing a couple things. One, we think it's producing just greater volume.
There are more people coming to the table around fixed income execution than we've ever seen.
So as we think about that, that's exciting. And then I think it's also sort of leading to the solutions that are coming out of that connectivity and having more people around the table. And so as we look forward, I think it's only going to feed on itself and go at a faster pace. And that transparency and liquidity and connectivity I think will grow both from standpoint of our execution as well as like indice production as we go forward.
Marina: I mean, we're definitely seeing the result of that and the benefit that it can serve I think to the broader investment community and the broader investment market portfolio trading protocols, right.
You touched on that clearly changed the name of the game in terms of how one can transact fixed income. That data allows transparency inside benchmarking and indices to then create next kind of evolution of product.
So outside of, let's say, your typical transactability in rates than in credit. I know you've been looking at other asset classes. Obviously historically you ran mortgage trading, you know, in your prior life pre- Tradeweb. How do you see it transforming, let's say, other asset categories?
Troy: So, I think what we're seeing is the solutions that we're coming up with and having a great connectivity with our clients. We're now applying that across multiple product sets. And so to kind of give you an example, agency mortgages, which is sort of been a linchpin business for Tradeweb for the last 25 years and has been the most electronified business from our perspective. So it's somewhere around 75 or 80% electronified.
So as we look at the scope of products, it's probably the most electronified. It is set with 25 years with exactly one real protocol, which is RFQ. We're now bringing portfolio trading into the agency mortgage space. We're bringing RFM into the agency mortgage space.
And I think it dovetails and tells you the story that we're going to be able to use protocols and workflows across multiple products as we think about Tradeweb, where we're bringing the sweep element from, you know, from historically from rates and credit into the muni space. And so we're going to continue to sort of square that circle, if you would, around taking protocols that we know work in certain parts of our business and moving them and being dynamic around that.
And I think there's a couple of things that happens. One, it creates sort of greater velocity, but more importantly, we think that it helps with just the execution of the asset classes. And so, you know, not like it's brain surgery, right, but I think it is dynamic to make sure we're thinking about what solution works for which product and, and having that conversation with our clients across, as I said, multiple products.
Marina: I've seen what, you know, this idea of being able to create kind of end to end institutional workflow automation at the heart of how people think about investment in general, right?
And from our seat, I think that's very exciting because then fixed income no longer becomes this kind of difficult, hard, can I really think about investing and really brings it, I think to the forefront.
You know, one of the predictions that was being made is really pushing fixed income towards real time execution at scale, at size with liquidity. And I think that's an exciting future.
And for me, the work that Tradeweb is doing around bringing, I guess the kind of institutional workflow automation and what that allows then for benchmarking to do where indices will sit at the front of capital allocation creates this kind of workflow. That's, that's quite exciting.
So we always love partnering with you and, and thinking about those. But maybe if we change, you know, topic a little bit and, and just talk a little bit about it's not just the protocols that are changing, it's not just the volume and the execution, but the rails are changing underneath as well.
And to me that can fundamentally shift how the financial markets can transact and can think about changes And so of course, I'm talking about the digitisation and the opportunities there.
You guys have taken very formidable steps towards bringing fixed income onto some of those rails. Maybe talk to me a little bit about how you think about that. How do you see that market evolving over the next couple of years?
Troy: I think you Tradeweb we like to think of ourselves as being at the tip of the spear around market evolution. And it's one of the things we said to our clients is like, help us help you with regard to how markets are going to evolve because I think we've got a pretty good footprint from that perspective.
And so 2 1/2 years ago, we invested in the Canton network as sort of a, a blockchain solution to tokenisation and to digitisation around at, you know, fixed income assets. And so we've been excited about that.
It's interesting, right, because blockchain has been around forever and we finally found sort of a problem for blockchain to actually solve. So it's this interesting sort of regressionary history.
Marina: And much better to have a solution to a problem than a solution looking for a problem, isn't it?
Troy: Yeah. So I think, I think we finally melded those two. We're excited about the, you know, the concept of tokenisation. We think that in today's day and age, sort of figuring out how cash moves in a much more efficient way will solve a lot of problems for certain clients, not for every client, but for certain clients. And so we're excited about that.
Now are we in the camp that every single fixed income asset is going to be tokenised and that'll be the only market that trades? We're not there.
I think there's going to be a sort of DeFi and TradFi world that lives in congruence with each other and some overlap.
And so that dynamic is what we're trying to figure out, like what that exact overlap looks like. But you know, the pathing that was there. And I always say I'm like, water finds its level.
So for the people who have sort of said, I'm not going to focus on tokenisation because I'm, I don't think it ever sort of really follows through. I think that cat is out of the bag and I think it's moving in one direction and water will find its level.
And then sort of the concept of digitisation of assets and thinking about crypto and like how do we have 24/7 trading and how do we move cash around in a more efficient way is I think at the linchpin of what the whole concept is. And so Tradeweb is super excited about it in large part because we view it as efficiency back to the transparency and back to the volume-based execution. So it provides that.
And then I think also we want the markets to continue to evolve in a dynamic way and this is definitively that pathing.
And as I said, we like to be at the forefront of it and be able to solve some of the problems that initially present themselves because then we have the full history, right?
So Tradeweb is almost, you know, 20, north of 25 years old and we've got the history of the evolution of electronification and fixed income.
We think we're now at the knife's edge around tokenised assets and sort of having that history will be super valuable. And you know, we're excited to see what the next 24 to 36 months brings within that space.
Marina: Agreed totally with your point around there'll be a spectrum always of the institutional investors and how they think about that and how ready they are to continue. But efficiency of cash, efficiency of trading is certainly a big topic of conversations for firms. And you know, obviously a big topic of support that that Tradeweb can provide to those markets.
So maybe just sticking with the theme of how one thinks about efficient markets and how one thinks about institutionalization of those markets. One of those trends I think that's been a topic of conversation recently has been around prediction markets, right?
Unlike other markets that started maybe in institutional OTC and then electronified and then were brought into retail, this one seems to be coming the other side, right?
So something that started as a more retail focused phenomena, thinking about what could it possibly mean for institutional investors and for me, I think of course sitting and benchmarking, one of the more exciting things about that is can you think about data that is discoverable through the prediction market as being an institutional investable theme and what could that possibly look like?
Obviously we're at early stages of that and you know, indices with the regulatory lens we have to, you know, typically we watch and then index markets. But you know, Tradeweb has been at the forefront of a lot of these conversations with the investments in Kalshi.
How do you see this market and, and the potential opportunities there?
Troy: Yeah. So when we first started doing some work on the prediction markets is it was obviously a lot of trepidation around, as you said, the regulatory issues. And you know, Kalshi served as an interesting partner for Tradeweb in large part because of the regulation around CFTC most importantly, and they spent a lot of time and energy around that. So that gave us some comfort level.
And then we thought about like, OK, what is the prediction markets, right? So let's exclude like sports gambling because that's not something we're interested in. But like the contracts that actually relate to financial markets, the data's proven to be more efficient and more truthful than polling or estimations.
And so it's something that we know our clients will want to use and implement into their investment process So that was sort of the core thesis around it.
And then as we thought about like, OK, what does it bring to the market? These contracts are binary options. So that's unique to the market.
You know, I used to say, when I ran a big mortgage trading desk, I'd say if I gave you the employment number, you're not guaranteed to make money.
Under the scenario of binary options, if I give you the employment number, you're definitively going to make money. And So what does that mean to the market structure back to the, you know, the initial conversation?
Well, it means that if I have a particular risk that I'm uncertain on that I want to hedge out of my exposure, I can do that through binary options.
And so to the extent we can make this institutional, in theory, it should create greater volumes because I would be more willing to take greater risk if I can eliminate the one uncertainty in certain sort of trades or exposures that I have.
So that's exciting.
And as we think about the partnership with Kalshi, we've kind of broken it out to sort of three different things. One being kind of get the data on our API and like connect with our clients in the way that they're normally used to being connected to on an institutional level. And we're, you know, we're at that point now.
The next level of it is taking their data and incorporating it into our proprietary data to produce better predictory execution as well as monitoring. So we think that's sort of stage 2.
Then stage 3 is obviously creating a real institutional where you have enough size to be executed at the institutional level within these prediction markets.
There's a long way from here to there and that's kind of what you mentioned earlier.
But you know, we feel like there's definitive pathing to get there and we're seeing a ton of interest from our clients on the topic.
I’ll say when the Kalshi announcement came out, we got more reverse inquiry than we've gotten on any other announcement that we have. And just speaks to the excitement around prediction markets in like what they could be. And so early days as you mentioned, but exciting.
Marina:
Yeah, you have to start somewhere.
Troy: You do, you do. And it's exciting because I think there's also, you know, to the extent that market develops and institutional there is definitively routing around indexing as well as, as sort of the trading and so dovetails into the relationship between FTSE and Tradeweb very nicely.
Marina: So maybe just to close off, since we've just talked about prediction markets and what that can turn into your prediction as we sit here today, five years out from now, what do you think will be obsolete things that we, let's say rely on today that become obsolete or converge into that future?
Troy: As I think about it, right, I think, you know, we talked about more people coming to the table as a result of transparency and fixed income. And I would say five years out, I think those walls are even lower. And you'll have more and more of like institutional versus retail will start to sort of meld together to a certain extent and we'll start to look at them in very, very similar ways.
I would expect people to be executing trades both in the prediction markets and in every market on their phones. And so this concept of having to have like institutional connectivity to execute, I think will slowly but surely go away as more and more people come to the to the table.
And I think Tradeweb’s, you know, trying to be as thoughtful as you possibly can around those evolutions, and how do we help create the transparency, the connectivity, and quite honestly, like from a regulatory standpoint, the right framework for those trades to get executed in the new evolved way.
And so there's a lot of visions on this. And you've probably talked to 10 people at Tradeweb, they have 10 different ideas. But I think the one thing that's clear to us is like how things are currently transacted across multitudes of products will be changing over the next four to five years for us.
Marina: That's very exciting. It's exciting to be partnering with you guys to be able to shape and deliver that future because to your point, the removal of the barriers to trading, the introduction of the efficiency to that trading and the role that I think you put it beautifully, the framework, that institutional quality framework that creates the trust and the data transparency that's required to be able to deliver that future is something that certainly sits at the pedigree for FTSE Russell from an indexing perspective and certainly sits at the, you know, baseline pedigree for Tradeweb.
So definitely a lot of things to look forward to. We'll reconvene in five years’ time, Troy and see how far we've come.
Troy: Sounds like a plan. Thank you very much.
Marina: Thank you.
