TAKING THE LIQUIDITY REINS.
Pauli Mortensen, Head of Trading, Global and Øyvind Schanke, Chief Investment Officer, Asset Strategies at Norges Bank Investment Management believe asset managers should adopt a much more proactive role in today’s changing environment.
Pauli Mortensen has been Head of Trading, Fixed Income, globally at Norges Bank Investment Management, Oslo and London since October 2013. He has had many different roles since he joined the group in 2001 including Head of Trading, Fixed Income, Eurasia, Senior Trader, Treasury and Fixed Income Trading, Senior Portfolio Manager, Relative Value Strategies, Oslo. Mortensen started his career at NORDEA/UNIBANK in 1992 where he was an Economist/Analyst, Senior Dealer, foreign exchange and money markets and Chief Proprietary Trader, Treasury Markets. He has a masters in economics from the University of Copenhagen.
Øyvind Schanke has been Chief Investment Officer, Asset Strategies, London since 2014. He joined Norges since 2014. He joined the group in 2001 as Head of Trading, Oslo before becoming Global Head of Equity Trading, Oslo in 2008. Previously, Schanke was an Equity Sales/Sales Trader at Gjensidige Nor Equities and Sales Trader at Handelsbanken Markets, New York. He has a MBA Finance from the Norwegian School of Economics (NHH).
How do you see MiFID II impacting the fixed income sector and what changes do you think the industry should make?
Pauli Mortensen: I think MiFID II will be helpful. Today, we are trading with blinkers on for many securities. If you search for x or y in dark pools it can be cumbersome to agree on a clearing level because you don’t know where the fair value is. Post-trade transparency will be beneficial to the market.
Øyvind Schanke: I agree, but I think that MiFID II does not go far enough when it comes to post-trade transparency because there are too many bonds that are exempt from the regulations. In terms of the changes we would like to see in fixed income, we are supportive of a move towards an agency model alongside the traditional principal-based model. There is however, resistance from the largest banks, and not everyone on the buyside is pushing for this either. There is a view that because this is the way we have always done things, we should continue doing so. We do not believe that is a healthy approach.
What are the benefits of also having an agency model?
Pauli Mortensen: When it comes to pre-trade transparency, the agency model will improve liquidity in bond markets. In a principal world, under MiFID II, we will see wider bid-offer spreads because systematic internalisers will have to quote for other clients. However, with an agency model, there will be no intermediary and the buyside can post a bid-offer directly onto a platform.
Øyvind Schanke: There are around 30 or so different trading platforms on the market and they all want us to connect to them. However, the banks are in the middle and they should connect on our behalf. An agency model would be ideal for letting us plug directly into both lit and dark platforms.
Overall, what is your assessment of electronic trading and how do you see it evolving in the future?
Øyvind Schanke: When it comes to electronic trading, I think we are moving in the right direction. Over the last 10 to 15 years, Tradeweb, Bloomberg and MarketAxess have made it much more efficient to trade fixed income versus the traditional voice trading. However, it will be a long time before we see it work completely. This is because the buyside has not changed the way it executes trades. Request for quote is still the most popular method and firms are not using a type of central limit order book to post prices. Change is always difficult, and as the street used to provide a lot of liquidity there is the hope that it will return, but it is different now. It is ironic that issuance is higher than ever, but there is a lack of liquidity because banks are no longer able to warehouse risk due to stricter banking regulation. The question is how can we make all the liquidity points meet?
Pauli Mortensen: The buyside fundamentally needs to trade, but the sellside is now constrained so when it comes to electronic trading of fixed income I believe it will take off in an exponential manner. As long as there are vendors out there who provide the right technology then it is only matter of time before electronic trading attains critical mass. I also see platforms emerging where both the buy and sellside participate together. However, it is not just a technology issue, but also requires a behavioural change for the buyside. If they decide to wait for liquidity to come to them and not take an active approach, then they will be waiting for a long time.
What about the role of corporates?
Øyvind Schanke: I definitely think that corporates also have a bigger role to play. They should ask themselves if it is really necessary to issue so many non-standardised bonds that by default become illiquid. There are banks with thousands of outstanding bonds, and although they will argue it’s for maturity matching, they are not doing themselves any favours. Asset owners should care about this, as it leads to higher cost of capital. I think there needs to be a maximum number of bonds a company can issue.
What if any changes will Norges have to make?
Pauli Mortensen: We have facilitated the move to being more of a price maker as well as price taker and have given our traders more discretion in how they can trade with a short-term investment horizon according to pre-defined boundaries. To safeguard the long-term investment horizon each trader belongs to an investment team that includes portfolio managers and analysts, and we make sure to incentivise the trader to enhance the performance of the team’s portfolio. It is no longer just about his ability to execute, but also to provide market intelligence, develop ideas and help implement the portfolio managers’ ideas. The trader adds value by explaining what to focus on and how we can take advantage of dislocations in the market.
Øyvind Schanke: Yes, we separated the role of portfolio manager and trader in fixed income after 2008. We already had this separation in equities and what we saw as a natural barrier between the two in the fixed income world has now become more blurred. We decided we wanted to be more proactive, given liquidity has become such an issue, and changed the structure so that they could work more closely together.
What impact has the drop in oil prices had on your fixed income strategy?
Øyvind Schanke: The fall in oil prices has not changed our investment strategy. The income from dividends as well as coupons is large enough to offset the withdrawals from the government. We have a global approach which is still 60% invested in equities, 37% in fixed income and the rest in real estate. We also apply environmental, social and governance criteria across the entire portfolio regardless of the instruments.
What do you see as the biggest challenges as well as opportunities going forward?
Pauli Mortensen: I think the challenge can also be seen as an opportunity. As I said earlier, the buyside need to restructure the way they trade and become not only price takers, but also price makers. They underestimate how much value this can add to their investment decisions. My fear though is that they are so pre-occupied with regulation and requirements that they are not making this a top priority.