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Validating Systematic Fixed Income Strategies With The Right Data

Data is a key prerequisite to creating and running systematic strategies. Without data, the strategy cannot build or subsequently respect a rules-based structure. Reflecting on traditional systematic trading products in equities and derivatives markets, each one typically has robust and available data which, in several cases, is drawn from trading exchanges and then applied to the strategy. The lack of data in fixed income credit, alongside the respective market’s trading structure, has meant that systematic strategies have remained relatively nascent in these more opaque markets. However, recently this has changed as fixed income electronic platforms have enriched existing data sets and built sophisticated data tools – tools which mean systematic strategies can now prosper in fixed income.

The fixed income credit market does not possess trading exchanges like those in the equity markets. Instead, it relies heavily on voice execution and, increasingly, electronic trading systems. Estimates from Greenwich Associates show that electronic trading in US credit is now approximately 30% of market volume, up from 20% a year ago. This shift in execution structure means that bond trading venues possess an increasingly valuable data set from which they can build more sophisticated and insightful tools. In addition, the same trading venues have built tools that enrich data available as a result of regulatory rules, such as TRACE in the US. It is the combination of these tools which creates data sets which have not previously been available in fixed income credit. In turn, this has created an opportunity for firms to use the data to build and run systematic investment strategies.

Leveraging a consultative approach together with the expertise of our data scientists, many investment managers are now looking to confirm the potential opportunity for a systematic fixed income credit strategy; the type of data and analysis now available is giving funds unique inputs allowing them to assess the opportunity across sectors, industries and even individual bonds. With hundreds of thousands of individual bonds available in the credit market, it’s hard to know which will maximise your strategy, hence why collaborating with clients is so crucial to find success. Assuming such data validates the opportunity, the same data can be consumed and employed for the live strategy via API, FTP or through Excel add-ins.

Data allows systematic funds to see through the fog, establishing the validity and viability of the strategy. The same data then allows assessment of live market opportunities, framed within the rules of the strategy. It is the enrichment of existing data by vendors alongside the construction and development of their own bespoke solutions which has helped fill data gaps left as a result of different regulatory regimes or comparably opaque market trading dynamics and data capture. These continued improvements in data leave fixed income systematic credit strategies with cleaner, clearer signals upon which to execute.

Max Callaghan is Head of Hedge Fund, ETF (EMEA) and CEEMEA Sales at MarketAxess

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