Using Technology To Drive Transparency

P.21 Q1 15

With AXA IM’s Paul Squires, Head of Trading, Lee Sanders, Head of Fixed Income and FX Dealing, and Yann Couellan, Head of Fixed Income Execution.

Paul: I suspect by the time we’ve finished this discussion you’ll realise that we’re big supporters of technology. That said, people are much more important than technology because experience remains a very valuable asset. Technology can only enable you to execute what the market allows you to, whereas human experience adds value in deciding how to execute with that technology.

Within a fixed income environment, it comes down to which part of the fixed income market you are trading. You expect a lot more transparency in government bonds; pricing transparency, more insight into the macro, what kind of cost you are expected to pay to implement a trade. And a lot of that obviously benefits from technology, both internally and externally. When you move down the liquidity waterfall into EM/high yield, you expect less transparency. You expect to be taking a surrounding position, access pricing information on the bond. It’s very much tailored to which part of the world that you are trading.

Lee: We have segregated the areas that we trade and assign orders according to those areas of expertise. Orders in European debt will predominantly be traded in Paris, sterling will be traded in London, and then EM and high yield orders traded in London, and non-euros, anything around the edges is traded in London. Co-ordination by us for the fund managers is key. If the index-linked fund manager in London wants to place a trade with a euro or dollar leg, they will tell us and we’ll talk to our specialists and coordinate the trade to make sure the trade is executed correctly.

Paul: The underlying principle is: the narrower the focus, the better the expertise and resulting execution. We have people dedicated to particular bond types even within fixed income. That said, building out to a multi-asset conversation, we have a lot of shared technology to harmonise where each clients’ needs are more efficiently taken into consideration.

Build vs buy
Yann: We need to extend our fixed income trading applications globally to Hong Kong and also the US. I think it would be fair to say that the international state in pre- and post-trade is slightly lagging. We will all benefit if we maximise efficiency on the pre- and post-trade information available on new issues and also the secondary market. The buy side community and the market globally demands more transparency on the primary and the secondary market in fixed income.

Many buy-side firms are at different stages of development with regard to their technology. Some do not invest very much and others often underestimate the size of the job that developing their own solutions can really amount to. You need big investment in terms of time and resource to develop proprietary trading tools.

Paul: Our parent and largest client is a very large insurance company and therefore, fixed income is our primary asset class. Yann is responsible for a very large amount of that fixed income trading which means we benefit from his expertise in deploying the budget. This allows us to continuously develop our platform for fixed income trading and stay at the forefront of our peers in terms of fixed income trading.

Most asset management trading desks that have an order management system tend to be off-the-shelf. Proprietary work is often done to extend that limited platform to give you trading functionality. With regard to multi-asset trading requirements, our OMS covers all asset classes but we also use an EMS for equity trading. In FX we also have an EMS functionality for some of our FX trades. For fixed income by contrast, it’s all been proprietary development under Yann’s leadership. Ultimately, it’s a question for each individual asset manager and their trading desk how to get the best return from the money that they want to invest.

Lee: We still don’t really know exactly how best to set any desk up for the regulatory impact that we’ve got coming down the road. Although with time, as that day approaches, we get a better idea of how the market is going to trade and what we need to trade in that environment. There’s a lot of consensus across the industry. The debate, and the way these topics are discussed at conferences, is very informative for all of us, but now everybody’s playing catch up. We need to see how the market structure is going to change and be part of that debate, and then set ourselves up in a way in which we can take advantage of those changes to put us at the front.

Yann rolled out an internal TCA which gives us immediate credibility, both internally and externally in terms of what we’re trying to achieve. Whether you put that at the beginning of what you’re doing or at the end will depend on the process in the middle. That process is all about trying to write a ticket at the best price possible.

The implications of this for us as a business is that more orders will be fragmented. We won’t necessarily be able to fill the order with one liquidity provider, but it will differentiate venues that we’re pointed to by using smarter technology which will be the coalface of our operation.

Yann: Benchmarking is something we continuously look at and extend year after year. As we gain expertise and make it much more efficient we increase our credibility both internally and externally. Due diligence conversations are more common, because clients are more demanding in how they check the cost of implementing a portfolio and all positions. Now, when we participate externally in these conversations, based on the analysis we’ve got and using our TCA we have minimum cost and maximum saving. This also allows us a way to profile a bank and also for traders to see where we can trade and benefit from that data.

Industry initiatives
Paul: Adam Conn of Barings, co-chair of the Buy-side Working Group of the FIX Trading Community, has led the initiative on the IPO project. The simplistic objective is to lessen the existing gap around operational risks that a lack of access to relevant technology creates. The new issue process still doesn’t use the latest tools. This creates operational risks when trying to coordinate interest from multiple fund managers and then transmitting that interest to brokers who are syndicating primary deals.

To have that operation transmitted by FIX for example, is immediately a positive step. We are already more advanced than most of our peer group in that we already have some automation around the IPO process. But on equities we still don’t have the same technology that Yann’s introduced in fixed income. The operational risks are therefore higher and regulators may come in and challenge you on that process because there are many different ways that interest can manifest itself: price sensitivity, interest indicated via value or number of shares or just different ways of approaching it by different clients.

Fixed income technology has suddenly opened up to a lot of innovation. Technology gets replicated quite quickly and then the challenge is to make yourself different again by innovating further. It’s going to sound a little bit philanthropic, but we have taken the view that there is a bigger picture out there and that the industry benefits as a whole from this universal access. Even though it will reduce our competitive advantage purely on execution of fixed income against our peers, we think it’s for the greater good. And that’s why Lee has invested a lot of time getting Project Neptune off the ground, not only by being another buy-side involved in the process, but intermediating with the sell-side to drive this paradigm shift for an asset class which has reaped very lucrative revenues for the big investment banks over the years. If you look at why the buy-side fixed income desk is getting involved in the initiative, it’s possibly because they had previously written off technology in this asset class. The thought process is as an OTC market, you can’t have that STP environment. The problem is, that a lot of people on the buy-side and sell-side use that as an excuse to not do anything. If it then becomes more feasible to develop a platform where they can develop that type of connectivity then they start to take more interest.

People’s ideas of how to be agile in the bond market vary greatly from institution to institution. It does however seem that now everyone’s working out how we can overcome the hurdles ahead of us. It’s been a real privilege to have been in the position to be involved in this.

Lee: Going out and giving people options around a solution, educating them on the advances being made and aligning that with the banks is the key to Neptune’s success. I think we have established some really solid foundations.

Through conversation, contact, conferences, and association with trade organisations we are working out what’s best for all of us. We’re not necessarily looking out for ourselves here. We’re looking out for the banks and we’re looking out for our peers because we need to have an effective and fair fixed income market for all to participate in. That’s what we are trying, as an industry, to achieve. Equity is not going to change that much, but in this context of industry-led change, fixed income is really where it’s going to change a lot.

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