Selecting a Fixed Income EMS: The Top 3 Questions FlexTrade is Asked Regarding Automation 

Technology pain points are pushing traders to seek more efficient ways to trade. That’s the main headline from our recent survey conducted with Coalition Greenwich on fixed-income EMS adoption.  

The survey polled 60 buy-side fixed income traders and found that a quarter of respondents highlighted “automated trading tools” as the desired functionality within a fixed income EMS to solve their challenges.  

Given that automation via electronification has been prevalent for many years in other asset classes, such as equities and FX, what does it mean in fixed income from an EMS perspective? Should an EMS even play a role in fixed income automation? The answer is a thundering yes.   

The following are the top 3 questions clients, prospects, and consultants ask us and our responses regarding automation via our fixed income EMS, FlexFI. 

1. What is Smart Order Routing in fixed income?

A key driver for adopting a fixed income EMS is the ability for bond traders to create execution strategies for no-touch, low-touch, and high-touch orders. Much like the concept of an algo wheel, which can automate routing to specific broker algos, FlexTrade’s Fixed-Income Smart Order Router (FISOR) enables traders to route orders to different FI strategies. 

For instance, FISOR allows traders to auto-respond to incoming Request for Quotes (RFQs) at a specified limit price. These can be RFQ from anonymous trading protocols like All-to-All Trading (A2A), and users can specify a limit tolerance and auto-counter if necessary. Another strategy example might be to automatically sweep any available order-book liquidity, followed by resting an order in a dark pool, then completing any unfilled order quantity with an RFQ.

Today, using FISOR, FlexFI clients are automating as much as 70% of their high yield and investment grade flow. Several clients are well on their way to no-touch automation, where the FISOR strategy builder is utilized to intuitively create, maintain, and route orders once eligibility criteria are met, eliminating the need for trader intervention. This approach helps traders be free from distraction so they can focus on alpha generation with more sensitive orders. 

An additional benefit to automation within FlexTrade, through FISOR, is that execution criteria are maintained across venues and all available sources of liquidity in one central location. Maintaining this single set of automation parameters within the EMS allows fixed income desks to consolidate processes and minimize fragmentation of their strategies. This can help reduce operational drag.  

2. We have automation via our fixed income trading venues; why do we also need an EMS for automation?

A fixed income EMS is a critical tool for enriching, not replacing, venue automation. Platforms increasingly offer more automation functionality, each with a distinct set of workflows, further highlighting the need for an EMS to aggregate. The FlexTrade team has worked extensively with trading platforms such as MarketAxess, Tradeweb, Trumid, and Bloomberg to build deep integrations that allow our mutual clients to leverage the range of venue protocols available, including automation, without leaving the EMS.  

While a single trading venue has access to the historical data and transactions on its own platform, it cannot incorporate other market data sources, including other venues. By managing automation from a single interface within FlexFI, traders can comprehensively respond to all market activity and take advantage of all protocols across venues. This broadens the power of automation beyond the scope of any one platform’s activity or data.  

FlexFI’s FISOR adds further value when traders customize arrival and dynamic rules to funnel orders in the blotter toward automation workflows across venues, normalized and with the desired parameters. For example, routing orders to auto-ex based on criteria such as DVO1, size, or liquidity score but only to execute when a price limit is met.  

It’s a rapidly evolving area. In cases where venue automation workflows could benefit from tweaks that are not yet supported or clients have proprietary automation workflows, FISOR can support scripting such strategies and exposing orders accordingly. 

3. What is the difference between fixed income “workflow automation” and “algorithmic automation”?   

An emerging discussion we’re seeing evolve centers on the difference between workflow automation, which is undertaken in the EMS, and algorithmic automation, which is undertaken by intermediary solutions that sit between the EMS and a venue.  

Workflow automation is handled within FlexFI, where defined trading strategies are executed through user-specified directives. All parameters are templated, and the trader decides when to send out a response, how much to iceberg, which sequence of protocols to try, and the timeouts in between. Exception handling and error condition behavior are all explicitly defined. A key detail is that the EMS itself makes no decisions for the user on where or how to route. 

Conversely, algorithmic automation is where a trading strategy executes via a set of user-specified directives, but ultimately makes decisions around when and where to execute and at what limit price/level. On this basis, in addition to normal user direction, an algorithmic system has discretion. Often, strategies also “benchmark” or quote themselves in terms of performance, e.g. slippage vs a consolidated tape like TRACE, or evaluated prices like MarketAxess CP+ and Bloomberg BVAL. An example might be a guaranteed price improvement of BVAL + 5 bps.  

As an EMS solution provider, we are often asked our opinion on algorithmic automation in fixed income. While it is an emerging area, some key considerations exist.  

For example, if you are using algorithmic automation, how is the limit price sent to the venue? Once the algorithm decides what the limit price should be, does the trader still need to input that level at the venue? When a buy-side firm says, “I want to auto-respond to inquiries of this type, and have your algorithm provide the pricing for me” it’s important that there are no further inputs needed from the trader that could diminish the workflow improvement. 

It is also essential to consider slippage. Is your automation provider measuring execution performance to quantitatively assess the price improvements they generate based on their decisions regarding limit price and execution timing? Again, if the answer to this is no, then you potentially have an additional manual process to add to your workflow.

Interested to Learn More?  

Automation strategies in fixed income trading continue to evolve. They can deliver tangible workflow benefits with efficiency and the overall goal of achieving best execution.  

To book a tailored session to better understand the value a fixed-income EMS can bring to your automation journey, please get in touch with me: Michael.Kovach@FlexTrade.com