It’s been an eventful year for fixed-income trading desks coping with extreme volatility during an unprecedented global pandemic. As liquidity in fixed income became scarce in March, buy-side traders reverted to traditional voice trading relationships, while some e-bond trading venues saw record volumes. Now that volatility has subsided, buy-side firms are refocusing on electronic trading and seeking ways to automate workflows and source liquidity. In this Q&A, FlexTrade’s Sales Director EMEA Manuela Bauer examines the significance of integrations between FlexTrade’s fixed-income EMS and electronic bond trading platforms, demand for protocols like direct streams and RFQs, and the potential for interoperability on the buyside trading desk.
Given the extreme volatility and fears over the spreading COVID-19 virus in Q1, what did fixed-income trading desks experience in March and April? What kinds of challenges did they face and what lessons did they learn?
At the beginning of March, we all watched markets go into turmoil – a combination of the COVID-19 virus unfolding, oil trade wars, and central bank policies which brought very difficult market conditions. While most traders remembered 2008 and had experienced extreme volatility in the past, this time was different, and in many ways, more unsettling because the health crisis came from outside the financial system, bringing unprecedented challenges.
At the same time, just when markets were at their most volatile, and everyone was trying to make sense of what was happening, trading desks were being split across locations and traders were working from home: this put buy side trading desks under enormous performance pressure, while undergoing reorganization of the desks which is a heavy lift logistically.
Above all, we have seen that trading desks have proved to be extremely resilient and adaptable. The past few months have shown traders can perform their job from home, given the necessary support from IT and their third-party vendors. Communication has been a big challenge. Working from home makes communication harder, including between traders and PMs. Chats and Zoom are invaluable tools for collaboration but require some adjustment when you are used to simply walking over to the next desk. Hacking risk and system security have also come under scrutiny, especially with people working from home. The outcome is rather positive though, as it is forcing the industry to make system security a priority and address any weaknesses.
What trends are you seeing on the buy side in terms of fixed income automation of low-touch and high-touch trades? What new trends do you expect to emerge due to regulatory burdens?
Dealing desks have been under pressure for a few years now, facing an increased regulatory burden, higher costs, and the pressure to navigate the wave of new technologies. This is not going away, but these recent trends in the industry will be impacted by the COVID-19 crisis, and we may see new trends emerging.
Demand for advanced automation, which lets traders focus on trades where they can add value, has been growing for the past few years. Starting in March we saw an increase in quantity of data, executions, and ticks. Robust technology enables the buy side to manage and make sense of large amounts of data while reducing trader intervention where it’s not necessary.
Asset managers that have the technology to automate already in place have an advantage, because it frees up their traders to focus on high-touch trades only. This is particularly valuable when market conditions are difficult. Over the past few years, we have seen more and more buy sides moving away from the asset class split and instead organizing trading desks around liquid/illiquid instruments. FI automation is picking up and becoming more sophisticated: we see real client demand for taking FI automation to the next stage with more granular rules configured at the EMS level. Automation requires better and more sophisticated data, centralized in one place, and an EMS provides just that.
You noted that clients are demanding fixed income automation, and media reports suggest that electronic trading venues experienced record-high volumes in March. Yet, at the peak of the COVID crisis, Greenwich Associates found that traders reverted to phones and traditional voice relationships. Why did this happen?
This is a reminder that despite electronification, bond markets remain dealer-based and are quick to revert to voice in times of extreme volatility, as we saw recently when liquidity dried up. Some bank algos shut off because they were not programmed for such volatility. For example, traders reported that 10-15m treasuries tickets had to be traded more like credit. Traders also reported that banks were often either not responding to RFQs or quoting bid-offer spreads that were so wide they weren’t executable. That means having to pick up the phone or negotiate on chat to find executable prices, and it also stemmed from a certain need for human interaction to try to make sense of what was happening.
When liquidity evaporates, good relationships with counterparties are crucial. Smaller and medium-size asset managers may find it harder to obtain good liquidity from counterparties, who may be more inclined to stick their necks out for larger clients. Access to counterparties is connected to the debate about outsourced trading. The recent events, when combined with the existing cost pressures on trading desks and the need for better liquidity, might push more buy-side firms towards outsourced trading desks.
With the proliferation of scores of fixed-income trading venues, market participants have complained about fragmentation and complexity. What progress have you seen in terms of integration between the EMS and electronic bond trading platforms?
The fixed-income trading landscape is evolving at a rapid pace. Both buy-side and sell-side participants are striving to streamline and rationalize their processes and workflows to increase efficiency and reduce cost wherever possible. The current workflow with so many “jumps” between platforms adds unnecessary complexity to an asset class which is already fragmented, with more instruments, security types, and varied market structures. We’re seeing more and more buy-side firms looking for solutions to consolidate available liquidity in one screen and to boost capacity to automate.
More openness is needed to progress from all stakeholders, and particularly technology providers. Some electronic bond trading platforms are opening to EMS integrations: For example, FlexTrade’s MarketAxess integration allows trading directly from within the EMS, as reported by The Desk. This is a big step forward for efficiency in FI workflow as it saves time and unnecessary platform hops and it’s proven to be very popular with our clients.
One of the biggest changes over the past year is that now banks are asking for direct pricing feeds and RFQs to clients. Data aggregation through the EMS is significant because it results in lower costs and more efficient access to liquidity. This is not a heavy lift for the EMS because this is something that already exists for other asset classes.
Direct price feeds, RFQs, and full integration to bond execution platforms provide more flexibility, more granularity and control in automation. Because rules no longer need to be bound to each trading platform or broker: they can be configured at the EMS level and made effective across all execution venues.
Initiatives for interoperability, like our work with Openfin, use interoperability layers to make EMS/third-party integration “plug & play,” making integrations between various applications seamless and easy. This not only improves user experience but also reduces development work considerably.
What are clients struggling with and how can the EMS help them?
The amount of data is increasing, and technology is rapidly advancing, which means clients are in a race to find the right technology.
First and foremost an EMS brings a capacity for development which is difficult to replicate for most buy sides. For instance, at FlexTrade we have 400 developers and engineers globally, all dedicated to bringing the best of trading technology to clients. Having such an EMS as partner ensures you have a trading system that is always at the forefront of innovation and technology, and very importantly, that 5 or 10 years from now you won’t be left behind by the increasing demands of technology or quantity of data.
Currently our clients are mainly focused on processing and making sense of large amounts of data, automating to ensure traders focus on trades where they can add value and simplify and streamline workflow. Our technologists and domain experts specialize in helping clients to achieve that. But the industry is fast moving, and a few years from now focus will probably be somewhere else and new trends will have emerged. Having a strong technology partner is vital for ensuring they are always using the most advanced technology in fixed-income trading, today and tomorrow.