Beyond Equities: Evolution Of Technology And Concepts Into Fixed Income And Currencies

Chris Rice.
With Chris Rice, Global Head of Trading, State Street Global Advisors

How can concepts from equities evolve into other asset classes?
At State Street Global Advisors I head up a global trading team with desks in Boston, London, and Hong Kong. Our trading philosophy is based on one really basic concept – to trade in the best interest of our clients as efficiently as possible. This philosophy was a core tenet that drove us to bring our global desks onto one common technology platform, across regions and asset classes for equities, currency and fixed income.

The primary focus of our traders is on client and portfolio manager objectives and market context and designing a strategy to accomplish their goals.

There has been a vast change in the technology and regulatory environment over the last 15 years which has helped to decrease transaction costs in US equities, which we look at as an evolutionary model that could be applied to other asset classes.

How does this feed into technology?
We look at asset classes in terms of liquidity. The listed market is the most liquid asset class because of the market structure that has evolved over time. So we approach other asset classes similarly and if you’re in currencies, for example, you can create something similar to the concept of a virtual limit order book, simply by working with various vendors.

It is a bit more difficult within fixed income, but if you cut across the top and look at liquid instruments that are exchange traded or over the counter, a common approach would be to electronify them to the greatest extent possible. If you have the equivalent of a central limit order book for an exchange or virtual limit order book for currencies within fixed income, you create the potential for a whole universe of bonds to trade.

On credit in particular, there are very liquid corporate issues that will trade, but for every equity issue there can be hundreds of debt issues. For example, General Electric common stock is very liquid (daily average value traded is roughly $750MM USD) but their debt issues are very fragmented; you can’t think about trading the debt in the same way.

Generally electronification makes the following more possible on these markets:
• Improves transparency.
• Increases order control and execution.

Moving to the second tier of less liquid instruments: small cap equities, emerging markets currencies, high yield corporate bonds; price and size discovery isn’t going to necessarily happen in a screen-based way, or a virtual limit order books, or a central limit order book. You have to take a different approach by picking up the phone a bit more which takes more time but you have to get more creative.

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This then starts feeding into the technology and to the Order Management System (OMS), because the OMS is the control station for all the trader’s activity. The OMS allows you to build your strategy, but it also gives you a glimpse into the future. When you ask “What is possible within fixed income?”, even if you have a Request for Quote (RFQ) market, there may be other order deployment methods that could be created to push orders from a fragmented dark space into a more communal and transparent space for execution.

Because fixed income is not exchange traded, there are many order characteristics we’ve talked to dealers about in terms of gaining more insight to their inventories in a streamlined fashion using simple software which would allow them to present their inventory in a way that enables us to react and respond electronically, or at least to better understand the breadth and depth of it.

What is the progression across asset classes?
Greg Berman from the SEC likened the equity market to the operating system for an iPhone, and the apps that iOS handles as the instruments that go through the exchange of the iPhone. For non-equities, there is no iPhone equivalent – no central operating system or nerve centre. There’s over the counter for currency and over the counter for fixed income.

Currency appears to sit in the middle; if you’re thinking of G10 currencies where dealers can provide streaming prices into a virtual limit order book, currencies are actually the nearest cousin, if you will, to equities.

There is sufficient liquidity at a touch to virtualise and create a screen-based market because liquidity is there. When looking at topics around market structure challenges for equities, a lot of them relate to currencies: for example the high frequency presence or fill ratios. This “equity recipe” can then be integrated into currency in the same way, through electronification and equitisation.

“Currency appears to sit in the middle; if you’re thinking of G10 currencies where dealers can provide streaming prices into a virtual limit order book, currencies are actually the nearest cousin, if you will, to equities.”

We are trying to stay on top of that efficient frontier of electronification and to push that frontier out by being very active with market participants, with vendors, and also regulators, because a successful solution will rely on all of these groups. We have engaged in very productive dialogue with our regulators across regions on these topics.

How does this feed into conversations with the sell-side and vendors?
Everything we do at SSgA is technology-enabled and we have primarily taken a buy versus build approach. John Wysocki, our Head of Cash, Compliance, Fixed Income and Trading Technology and I are attached at the hip so we can realise our vision for technology and aggregation of liquidity. We have a strong foundation with our order management system, and have stayed with one vendor as we’ve expanded out into currency and fixed income. This is a global discussion within the firm; liquidity issues and secondary market liquidity are big challenges. Revolutionizing an industry that is nearly 150 years old will take time and teamwork.

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