of labour, portfolio managers could focus on the long-term
portfolio construction and traders on the short-term timing
and the sourcing of liquidity in the market. From a compliance
perspective, the separation of trading also ensured that all
transactions were monitored by at least two people.
portfolio manager and the trader. Even though prices in most fixed-income markets can be observed on a screen, there is little transparency regarding market depth – how much volume can be traded at specific prices, and how much volume there is above and below the current market price. Most observed screen prices are not firm – the banks are not actually obliged to trade at the prices they quote. It can quickly become a challenge to set a fair internal price for a specific trade size. Another obstacle to replicate a traditional market-maker desk is that these are run with profit in mind and therefore include compensation for the risk involved when quoting a price. A trading desk in Norges Bank should not explicitly be a profit centre as it would potentially create an internal conflict of interest. An internal trading desk’s purpose should be to provide a service to the fund and its portfolio managers that ensures cost-efficient implementation of investment decisions to minimise the market impact.
The separation of the investment decision and its implementation in the market took place gradually from March 2008. By the fourth quarter of 2008, all orders were instructed by a portfolio manager and executed by a trader in the market.
A good dialogue between the portfolio manager and trader every time an order is sent to the trading desk has always supported a secure and transparent process. Portfolio managers will typically specify the intention behind the order in terms of immediacy and price targets. These inputs give the traders the prerequisites for assessing how to execute the trade.
Measuring trader execution performance has always been an ambition but a very complex matter. The lack of a consolidated tape – a central register that reports all bond trades with price, volume and timestamp – makes it impossible to reasonably measure traders’
shortfall (implementation cost). Consequently, the focus has been on driving trader
performance measurement towards hard performance numbers, as described later.
Setting up an efficient trading desk involves establishing trading guidelines and procedures to define the workflow of orders from the portfolio managers through to execution on the trading desk. One of the first tasks for the trading desk would be to find an order management system (OMS) to handle our portfolio managers’ orders in a structured way, where all steps from initial order to final trade execution would be captured and recorded. In previous years, the fund had invested time in finding a better portfolio management system, and an early decision was made to use BlackRock’s system called Aladdin.
The system also had an OMS module, and this was implemented in May 2008 as the first real OMS used on the trading desk. The desk used Aladdin until it was replaced with Linedata’s system Longview in February 2016. Several systems have been built internally to manage interest rate risk and orders to support the trading process.
127 inception and then to seven from 2014 to 2018.
This included one to three traders based in our London office from 2015 to 2018. From 2013, we hired externally to build a dedicated fixed-income trading desk in Singapore to cover our growing activity in Asia. The team there grew to three full-time fixed-income traders in 2015 and has since consisted of two or three traders.
Since inception, proximity to our trading counterparties both in terms of geography and time zone has put our traders in the best position to communicate and gain market intelligence from local market players. Trading presence in the various regions has also made it easier to recruit local trading expertise. This is of utmost importance in a people business based on relationships and mutual trust. The fund’s ability to retain and hire very senior personnel and utilise their skills through specialisation has taken the fund through challenging times with no major market disruptions.
The trading team
The people who moved to the trading desk in 2008 were all former fixed-income portfolio managers in the fund. The desk was fully operational from inception with very experienced traders, many of them with backgrounds in market-making outside the fund. We have recruited traders both externally and internally over the years. Where there has been an immediate need for senior traders, we have hired people externally with trading experience, mainly from the sell side. Experienced trading colleagues then trained internal hires from other departments.
First, we established a trading team in New York and Oslo with three traders at each location. In Asia, we had assistance from our Shanghai office, where we had an equity trader with previous experience from fixed-income trading on the sell side. The team in New York quickly grew to four traders and has varied between three and six traders over the years. In Oslo, the team grew to four members shortly after
Number of fixed income and foreign currency traders per region, 2008-2020
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Singapore Oslo/London New York
Number of traders by specialization, 2008-2020.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Developed markets Credit Emerging markets Foreign exchange
Chart 37 Number fixed-income and foreign-currency traders by region, 2008–2020.
Chart 38 Number of traders by specialisation, 2008–2020.
The trading activity
The trading desk was established amid the financial crisis, so one might have expected high trading volumes. On the contrary, trading volumes were much lower in 2009 and 2010, and we have to go right back to 2001 to see similarly low volumes in absolute terms. The fund was much smaller then, so trading volumes had never been lower in relative terms than they were in 2009 and 2010. There were two main factors behind this. The first was the extensive overhaul of fixed-income management in 2008, going from being a very active leveraged investor to managing the overall portfolio exposure in 2009 and 2010. The second was the dramatic fall in market liquidity in 2008–2010, which put a lid on many micro strategies due to higher transaction costs. In 2009 and 2010, trading volumes were only around a quarter of what they were in 2004–2007. Volumes in 2008 were heavily impacted by a deleveraging of the Providing feedback to the portfolio manager on
the execution helps build internal trust and knowledge to support future investments. The communication between the portfolio manager and the trader in Oslo was initially by telephone as the trading desk was located on a different floor. However, permanent chatrooms were soon established to supplement verbal
communication, as written communication in chatrooms is an effective way of sharing information between areas. In New York, where a smaller organisation allowed for closer collaboration, it was quickly discovered that there were benefits from having traders sit next to the portfolio managers. The possibility of instantly sharing specific market information was paramount in making good investment decisions, not least because they can be implemented in many different ways in a large bond universe. In Oslo, portfolio managers moved to sit back-to-back with traders in 2013.
Total trading volume per year, all bonds by region. Million US dollars.
Total trading volume per year, all bonds. Percent of total value of bonds.
Chart 39 Total trading volume per year, all bonds by region. Million US dollars.
Chart 40 Total trading volume per year, all bonds by region.
Percent of total value of bonds.
129 unwinding of interest rate swap positions in
2008–2009. Since 2010, the fund’s use of interest rate swaps has been low relative to bond trading, with the exception of 2011 when market
opportunities led to increased trading.
Since 2015, all new derivatives trading has been cleared at the London Clearing House. This activity has mainly been used to express relative value strategies between the pricing of bonds and interest rate swaps. Following best practice in central clearing has meant that the fund has had no bilateral counterparty risk from derivatives trading since 2015.
fixed-income portfolio and so high compared to 2009 and 2010. The jump in 2011 was mainly triggered by uncertainty within the European Monetary Union. From 2012 to 2015, trading volumes stabilised with the new structure on the portfolio management side, and variations from year to year were explained by market
opportunities. The implementation of emerging markets in the reference portfolio took place in these years. From 2016, trading volumes increased gradually, due partly to the new setup on the credit trading desk, and partly to increased opportunities in micro strategies as liquidity returned to a new, lower normal than before the crisis.
Trading in interest rate swaps took place on a bilateral basis until 2015 and was a vital instrument for fixed-income strategies in the years before the financial crisis. The restructuring of fixed-income management in 2008 led to an
Total trading volume, interest rate swaps by currency. Billion US dollars.
0 US dollar Euro British pound Other
Interest rate swaps volumes by currency. Percent of total value of bonds. US dollar Euro British pound Other
Chart 41 Total trading volume, interest rate swaps by currency. Billion US dollars.
Chart 42 Interest rate swaps volumes by currency.
Percent of total value of bonds.