Better Data, Better Trading: True for Fixed Income Too
Has the financial industry failed to adopt technology that would help the end user, given the 20-year history of electronic trading in fixed income?
This was the question put to the panel evaluating which electronic trading tools have had the greatest impact for the buy-side. Representing the buy-side, regulator, execution venue and data services, the panel argued a careful no, while laying out the steps needed to push on.
If electronic trading in credit markets has been around for 20 years, then what is new, asked Stu Taylor, CEO of Algomi. Answer: data. “We should be thinking about the digitization of the whole process, not just execution. We have not put enough effort into the liquidity problem occurring before the execution.” Only by putting information around traders can they can make the connections to decide to enter the market, he added.
Buy-side traders are under pressure to change, but do they have enough information, suggested Tsai Li Renn, Senior Vice President and Head of Fixed Income Trading for SGX. Platforms will be evaluated on how well they facilitate that change, as more price points will boost traders’ confidence, Tsai told attendees at the recent Fixed Income leaders Summit APAC in Singapore.
The Monetary Authority of Singapore (MAS)’s Deputy Director and Head of Financial Products and Solutions Division, Ong Boon Chye, said the regulator welcomes initiatives to promote greater market transparency.
The amount of data required to fuel new fixed income trading platforms is increasing quickly, especially as the data delivery transitions from an end-of-day push to real-time data access, explained Magnus Cattan, Senior Vice President of Price and Reference Data (Asia Pacific) for ICE Data Services.
With more data comes an increased ability to make better decisions through pre-trade TCA, Cattan added. However, many buy-side trading desks have historically viewed TCA as a post-trade process. Rather than evaluating new TCA solutions, many buy-side traders are looking for additional data to calculate their own TCA, Cattan said. Examples include an instrument’s potential trade capacity and how long it might take to liquidate a position.
“The TCA offerings I have seen were all based on equity methodologies,” shared Carl James, Pictet Asset Management’s Global Head of Fixed Income Trading. “An Implementation Shortfall methodology cannot work for bonds that trade five times a year.”
For a buy-side fixed income trader, proving they entered the market at the same time as a potential counterparty, could be another significant metric for evaluation execution quality, suggested Taylor.
James replied that as a proprietary trading desk, it makes sense to have a watch list, but from an asset managers’ perspective, trading is the result of a much longer process. In many cases, the information would need to be inserted into the asset allocation and portfolio management process well before it arrives at the trading desk, James said.
More fluid, if not bigger
To continue developing electronic trading in fixed income, the goal of all platforms should be to encourage investors holding pools of liquidity and are not currently active in the market to trade.
Any solutions that encourage diverse participation are welcome, according to the MAS’ Ong. New platforms may decide to develop solutions catering to different segments within the fixed income market, Ong mused.
As a counterpoint, James mentioned that although Italy has a history of retail participation in fixed income, it is still less than 1% of total bonds traded.
In the institutional space, currently most of the volume in fixed income is concentrated in 20% of the trades, Tsai reported. Electronification has happened fastest in smaller trades, often through RFQs. However, many feel the RFQ mechanism is no longer sufficient, and while it is not clear what its replacement should be, there are many platforms trying different trading protocols, Tsai said.
Market participants looking for solutions should remember new platforms do not create liquidity, but rather a more efficient means of access, reminded Cattan. Unlike in equities, the heterogeneous nature of fixed income instruments means different segments of the market will require individual solutions, Cattan said. To meet these diverse requirements, new bond trading platforms are offering a range of features, including dark pools, time based auctions and synthetic central limit order books, James noted.
New platforms may specialize by instrument or they may divide according to participant, be it institutional, retail, private banking or hedge fund, Ong mused.
It will take time for dust to settle but there will probably be between 5-10 platforms focused around a boutique or global offering, Cattan argued. “The data and execution will start to come together, in that the platforms will have to supply the data required to achieve the executions traders want.”
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