U.S. Credit Trading Q&A: Jim Kwiatkowski, LTX 

LTX focuses on innovating electronic trading for the benefit of the credit market.

Jim Kwiatkowski was named CEO of LTX, Broadridge Financial Solutions’ artificial intelligence (AI)-driven digital trading business, in November 2022. Markets Media caught up with Jim to learn more about how LTX has evolved since launching in 2020, and how the firm is bringing innovation to corporate bond trading.

Briefly outline your professional background? 

Jim Kwiatkowski, LTX

I’ve been in electronic trading for about 25 years, first at an equities trading system startup and then for 15+ years at FXall, both when it was independent and then as part of Thomson Reuters, Refinitiv and London Stock Exchange. Working in both exchange-traded securities and over the counter instruments has given me a good understanding of how electronic trading can enhance a marketplace, and how it can help customers with workflow needs.

What is the history of LTX? 

LTX was formed almost four years ago, when Jim Toffey, our chairman and prior CEO, and importantly the ex-CEO and founder of Tradeweb, had some ideas on how to improve liquidity and efficiency in the credit marketplace. He visited several large institutions to learn about their pain points, what solutions existed in the market, and where there was room for innovation, and came away with a couple core principles.

One principle was rather than relying exclusively on dealer balance sheets, finding natural liquidity was key while keeping dealers central to the equation, because the buy side really values their dealer relationships. And then, introducing more transparency, which often creates opportunities for price improvement, and helps to validate the achievement of  best execution.

The combination of those principles became the foundation for LTX.

What are the core components of LTX? 

A key component of the platform is our Liquidity Cloud®, where we collect axes from dealers and indications of interest from the buy side to aggregate natural liquidity. We do this anonymously, and then our neural network is used to alert contributors to contra natural liquidity, ie the other side of their trade. We show clients a pathway through one of their dealers, but we effectively alert both sides of a trade that there is a potential to do a trade in this CUSIP that you’re trying to get done. The natural liquidity might be another buy side client, multiple other buy-side clients, the dealer itself or the dealer plus one or more other clients.

Our RFX® protocol is an innovative trading protocol that allows for the aggregation of liquidity for block trading and offers the potential for price improvement.

First, a customer initiates an order with a single dealer; then the dealer either trades direct with its customer or invites other customers, with our assistance, who have demonstrated that they have natural liquidity and an interest in taking the other side of the trade. From there, committed responders’ levels are transparent to all involved in the trade, which allows customers to compete if they’d like to improve their price and it alerts the originator that there is a best execution process underway and a potential for price improvement.

A key component of the value proposition across pre-trade and execution is LTX AI®, which powers our Liquidity Cloud and other features including our pre-trading pricing, dealer selection analytics, client recommendation engine, and similar bonds functionality.

Has LTX built a “network effect” since launching in 2020? 

The network effect is critical for a product like the RFX protocol, where we are looking for the other side of the trade in an illiquid security. We have around 110 customers right now, which includes about 30 dealers and more than 80 buy sides. We’ve seen a great deal of support from the buy side, and we have an active buy-side advisory board that provides valuable insights and direction. Our advisory board includes AllianceBernstein, BlackRock, PIMCO, MetLife, American Century, Invesco, and PineBridge, and other firms have expressed an interest in joining to help us grow.

We’re signing new customers all the time. In terms of achieving the network effect, one of the ways we are expanding our network is by expanding our offering. Our clients have suggested that we build out our pre-trade analytics by leveraging the power of the Liquidity Cloud. We are also expanding our protocol offering in response to feedback from clients. Different trading scenarios require different trading tools, so we are building additional tools to continue to serve our clients’ evolving e-trading needs.

How have recent market conditions, marked primarily by rising interest rates, high volatility, and tighter regulation, affected LTX’s business?   

Regulatory concerns have reduced balance sheet availability dating back to 2008. Rising interest rates mean that the cost of capital for the dealers has dramatically increased, leading to even tighter balance sheets and the desire to reduce inventory more rapidly. So when we talk to clients, we hear about scarce liquidity conditions and the inability to get large trades done. The largest customers still benefit from their dealer relationships and can get their trades done, but when you move a bit further down the customer list, we hear very loudly that liquidity conditions have worsened with rising rates. We hear that balance sheet might be available, but it’s not always available to me.

That resonates with us, because those are exactly the conditions that LTX, was set up for. Our tagline is ‘Trade Smarter’. We have a data science team whose focus is to leverage data, and we’re trusted with a lot of data. With that privileged and trusted position, we can deploy data science and provide analytics that help our customers discover liquidity and get large trades done electronically.

The Liquidity Cloud deploys artificial intelligence, data science and machine learning to help alert customers to available natural liquidity, and the optimal pathway to tap that liquidity through their dealers.  The Liquidity Cloud takes your specific trade interest, ie bond, size, and price, and determines your real-time match(es) anonymously. We use machine learning to help determine the strength of your match, by providing a real-time Cloud Match Score. If the Cloud Match Score is an 8, that means you have an 80% chance of getting your trade done based upon comparable trades done in the last 30 days.

We’ve also developed dealer selection analytics, which help customers determine the subset of dealers that are most likely to provide natural liquidity directly or through their client network.

What are LTX’s key current initiatives? 

One customer need that comes through loud and clear is that any trading protocol needs to be integrated into the user’s current workflow. So we have invested quite a bit in partnerships with BlackRock’s Aladdin, State Street’s Charles River, and some of the leading O/EMSs to enable Liquidity Cloud and the use of LTX trading protocols to be seamless for users of their order and execution management systems.

We have six OMS and EMS partnerships at the moment, and we are seeing significant results in realizing the promise of being embedded in a customer’s workflow. I expect we’ll have more to announce on this front a bit later this year.

What is LTX’s raison d’etre? 

In the US credit market, electronic trading hasn’t become nearly as prevalent as it is in many other asset classes. In equities, US Treasurys, foreign exchange, and futures, you see 80% of the market trading electronically, whereas in credit, it’s in the order of 40%. While e-trading of smaller trades has increased over the last few years, the biggest trades, especially the ones over $5M, continue to happen bilaterally.

There are nuances to the credit market, but there’s also a lack of innovation, as many electronic trading tools have been around for 20 years or more. LTX is focused on innovating electronic trading for the benefit of the credit market.

 

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