Fixed Income Trading Desk of the Future
Data is shaping the fixed-income trading desk of the future. Keeping up with the exponential rise in data from inbound liquidity, new issues, and pricing services has become a challenge for asset managers in an OTC market landscape that is shifting and becoming more automated.
Demand for data is exploding with the evolution of the desk itself. On many buy-side desks, the trader’s role is no longer exclusively devoted to handling a single asset class – high-grade corporates or high-yield bonds. In the future, the role is going to morph into a broader mandate – renamed the low touch or high -touch trading desk.
Today’s fixed-income trader often doubles as the portfolio manager – or provides market color to the PM. Their need for data is accelerating in all the underlying sub-asset classes – corporates, municipals, mortgages and is responsible for aggregating and assessing more data points.
To survive this data tsunami, traders must leverage technology to harness inbound liquidity and manage outbound orders, as well as evaluate streaming prices from liquidity providers and counterparties, while executing through multiple trading protocols.
“The speed by which data is coming into the platform is something that legacy platforms have struggled with,” said Paul Clarke, Senior Vice President Strategy for FlexTrade Fixed Income (FlexFI) on a webinar that the firm hosted in March. FlexTrade built its fixed-income EMS over time to account for the different idiosyncrasies in each type of bonds.
A Flood of New Issues
Every day there is a new regulation, a new data feed, a new piece of analysis, a new trading protocol or venue that is altering the trader’s needs. This plethora of information begins with the explosion of new issues. Global issuance especially in corporate bonds has experienced record growth in recent years.
In 2020, US dollar-denominated corporate bond issuance soared 53.7% for investment grade (IG) to a record $2.014 trillion, while high-yield increased 30% to a record-high $570 billion, according to Moody’s Analytics Credit Review Outlook on Jan. 28, 2021.
The rise of new issuance platforms will allow the buy side to analyze deals without leaving the EMS. For example, FlexTrade is working on integration with Direct Books, a new issuance platform backed by 10 to 12 dealers, allowing the buy side to filter and evaluate the details of new corporate high-grade and high-yield issues, and send indications about their allocation interests.
Access to Multiple Trading Protocols
New trading protocols are also entering the market including electronic request-for-quote or eRFQs and demand for all-to-all trading which saw a major uptick in 2020. At the same time, the proliferation of fixed-income ETFs is creating a demand for an immediacy to trade against the underlying cash bond instruments. The fixed-income desk of the future will need to seamlessly manage that workflow and alleviate the stress on head traders scrambling to keep up with the data flows.
In an OTC market where there is no centralized tape and illiquid bonds may trade by appointment, the fixed-income trader must create an aggregated view of the bond markets and underlying sub-asset classes.
“Obviously, you are not in a liquid asset space, so you need to cobble together multiple different data points in order to derive what best execution is” from the dealers supplying the most aggressive prices or size in a name, these are all data points used during an evaluation,” explained Clarke.
Because bonds such as Treasuries, corporates and municipals have different complexities, we envision the fixed-income trading desk tapping multiple trading protocols and liquidity sources. We commingle streaming prices, reference-based RFQ-price points, external fair value calculations, as well as axe information from dealers in the Click2Trade panel.
Essentially, the fixed income desk of the future is going to have its own synthetic Level 2 order book specific to each bond asset class. FlexFI (FlexTRADER EMS’ Fixed Income Solution) already offers this by aggregating all liquidity from dealers, external pricing and internal proprietary research from quant models with Click2Trade functionality.
As an example, FlexFI brings in ICE’s Continuous Evaluative Pricing (CEP), which offers analytical data points, mean price, volatility metrics, and liquidity scores, to help the trader decide whether the price is fair, whether to trade now with urgency or wait until later.
Additionally, FlexFI integrates with Bloomberg, BCG Partners, and Markit, all of which provide analytics based on different asset types being traded.
“But this must also be seen in the context of a buy-side firm’s view of best execution, and how the individual trader, desk, or firm defines best ex, which is interlinked to how they feel about automation, efficiency and best price,” said Clarke.
Defining Best Execution
As the buy side puts this mosaic of data, pricing, and derived data from analytics together, the Execution Management System (EMS) allows them to create their own definition of best execution based on their own criteria and liquidity profile of the instrument.
From Flex FI’s “My Deal Panel,” a trader can view streaming liquidity, click on TRACE prints, historical and intraday prints and show who are the top dealers. Based on historical information, the EMS can decide which dealer will give them the best liquidity, which is meant to reduce the amount of manual intervention needed on a pre-trade basis.
Arrival price is something we create as a column across all the fixed-income asset classes you trade, and it is up to each trader to define it. If you are buying a municipal bond that trades less frequently, it may be a manual process of picking up the phone, but if you are trading a more liquid instrument such as a US treasury, sovereign debt, high-grade or high-yield corporate bond, arrival price could mean the last TRACE print.
Once all the aggregated data is loaded from a parent order, all the relevant information is displayed via the EMS blotter, including arrival prices, urgency information, and recommended brokers. The trader can do things like merging and splitting orders, managing account restrictions, highlight information, redirecting orders, and creating a block from the securities.
Rather than go to multiple screens to find data, we synthesize it all on one screen. “You can see what has been filled, any RFQs that have been sent and any streaming liquidity that has been sent on one screen,” said Clarke. “You can RFQ the trade to many destinations, and the fills then flow back to the EMS and then to the upstream OMSs.”
eRFQ & Portfolio Trades
With the proliferation of various trading venues, credit market liquidity can be fragmented across the likes of Trumid or Liquidnet and dealers. A trader can send out RFQ requests and conduct price discovery within FlexTrade’s EMS.
“The trader never needs to go into the venue directly because we automate that process for them including exposing all the parameters, price points, and dealer recommendations, “said Clarke.
To execute a portfolio of bonds more efficiently, we built eRFQ on the Trade Best screen, which we believe is massive differentiator in FlexFI.
If a trader has a portfolio of 20 or 30 names, there is no need to go line item-by-line item, and verify this a good price, or a bad price. Using eRFQ , you can get RFQs on a whole portfolio of bonds and execute them at once. Using the ‘Trade Best’ button on the eRFQ portfolio screen, you set up the system to define what ‘Trade Best’ means with one button, and you execute on all of them across the different venues.
When the executions are completed, all details of an order, including the average life of order and the average value of an execution, are stored within FlexFI and searchable.
Trade & Workflow Automation
One of the major challenges in fixed income is that asset classes are still manually intensive due to the illiquid securities and the nature of debt instruments. In certain cases, there are four or five order origination systems or data repositories housing importation information that is critical to the trading workflow. For example, a mortgage desk might trade CMOs and other bank notes relying on four systems that pump data into FlexFI, and we decide how to present that and organize the workflow. This could save 10-15 minutes per trade and when extrapolated over the course of a year, this could lead to significant savings.
The focus of our fixed-income platform is to organize and automate the desk workflows, connect with upstream and downstream systems, and venues. “Regardless of how many OMSs you have, market data or origination systems, all of that enters the platform and is normalized and managed in a systematic, organized way,” said Clarke.
“We take care of the upstream communications, manage the infrastructure within the FlexFI platform with all the different protocols, how you manage counterparties, and how you manage mandates on restrictions and directions.”
“The ability to manage merging trades together, splitting trades out from blocks, adhering to broker restrictions – all those data points flow upstream from the EMS to your OMSs.”
On the inbound firm liquidity side, we manage all liquidity available from dealers and liquidity providers, from market makers providing additional quotes, and from venues like MarketAxess, Tradeweb, and Bloomberg TSOCs.
Buy-side firms that are executing through FlexFI are capturing every data point across the life of an order. Whereas other OMSs and EMSs have limits on what they store, FlexTrade offers unlimited capacity. Everything from historical data points to charts and visuals on the performance over the life of an order, including average price life and average execution value, remains within in FlexFI.
From the blotter, traders will have access to best execution reports, end of day summary reports, and broker performance reviews.
If a trader is searching for a bond to replace a security that has not traded in two years, we offer a feature known as look-alikes, whereby the trader can search for exposure to whatever sector, coupon, yield, or duration, that meets their criteria for the portfolio.
In the future, fixed-income trading desks will continue to generate massive amounts of data as algorithmic trading and TCA gains traction. But they will need to rely on technology to push information toward them and to filter the data. Ultimately, the fixed income desk of the future is about data, liquidity, and workflow automation, and the EMS provides the horsepower and intelligence to get there.