Views on Bond Liquidity, Data and Automation

June 20, 2023 | By: Ivy Schmerken

With the Fixed-Income Leaders Summit (FILS) getting underway, hundreds of buy-side fixed-income traders will converge on Nashville this week to discuss the latest industry trends and challenges in navigating fragmented bond market liquidity. As the buy-side trader seeks to aggregate a multitude of pre-trade liquidity sources, trading protocols, and execution venues, many are turning to the execution management system or EMS to gain a competitive edge. In this Q&A, Venky Vemparala, FlexTrade’s Global Product Manager – Fixed Income, who is speaking at FILS, shares his views on the key issues facing the buy-side around data, trading protocols, and automation. 

What do you think are the top concerns of fixed-income traders attending FILS?

Venky Vemparala (VV): Many firms are experiencing increased order flow, and want to scale up, but liquidity is the main worry.   Buy-side traders tell us they are liquidity constrained. As dealers move away from balance sheet provisioning, they need to piece together liquidity from various sources.  

Liquidity is fragmented across protocols, each with their own rules of engagement. They want to see inside an EMS, the full picture of liquidity across all sources, venues and marketplaces Trading efficiency is a concern here, and seamless access to all execution workflows is key. 

What are you most interested in hearing or learning at FILS?

VV: What I am most excited about and interested to hear is the discussion around combining data and executions. For example, how do you take the pre-trade liquidity picture and create a rules-based guided execution? How do we take the trading blotter and its characteristics to efficiently look for liquidity in the direct actionable streams or use the pre-trade runs and axes to guide limit price and dealer selection?   

What kind of pre-trade liquidity sources are asset managers requesting to receive through the EMS?

VV: The buy side is interested in dealer/broker runs and axes, as well as pre-trade dealer streams through various sources. We also connect them to order book platforms. 

Is the buy side trying out different trading protocols?

VV: Unlike the past, when they were  hesitant to adopt new trading protocols, the buy side wants to experiment with every protocol. While RFQ [request for quote] is a dominant protocol used every day, auto-ex is popular for small tickets. Even within RFQ, there are nuances and variations that are evolving. For example, bond venues support multiple protocols, offering solutions to navigate or automate across those protocols. Buy-side traders have shown interest in optimizing their executions by triaging an order across all protocols within the venue. 

Our goal is to bring all trading protocols into one place within FlexFI. So far, our focus has been on clickto trade, clicktoengage, RFQ, and aggregating pre-trade liquidity from various sources. 

But some protocols, such as click totrade – where the buy is shown a price based on dealer algos -and can get the ticket executed immediately, are still building critical mass. For example, the trader may want more than three-to-five dealers in a click-to-engage stream – where they see a price and then start to engage to negotiate a price – before they will feel comfortable. 

Bond traders are also engaged with dark pools, and there is messaging via chat and voice trading with dealers. Another conduit of liquidity is all-to-all, which is one of the big product enhancements on the FlexFI trading platform planned for this year. This goes back to the point that the buy-side feels liquidity constrained. An asset manager could be sitting on a large bond trade and is open to liquidity discovery across all protocols. I expect there will be a lot of chatter at FILS around aggregation of execution protocols. 

How is the buy-side approaching the EMS in terms of customizing it to their needs?

VV: Every trading desk has its own idiosyncratic set of trading practices. One trader gets a ticket and decides to call their preferred dealer. Another shop could decide to put the order into an all-to-all venue for a period of time and see what sticks. Each shop has its own best practices around the workflow and execution tactics. We want to help them automate these and increase efficiency. 

How is automation evolving via the EMS?

VV: The operating concept is workflow efficiency – saving time and effort where you can and focus on high-value tickets that demand deeper liquidity analysis or trade planning. An early example of automation is a buy-side firm using a marketplace selection model based on bond characteristics and then routing the order through the EMS to execute it automatically.  

Then you have venues that provide automation, enabling a multi-step execution protocol like RFQ which can be automated within a set of parameters.  

You also have what I call “managed automation.” In this case, the trader executes an order or one piece of an order, with a particular trading protocol, but if conditions change, or after a certain amount of time, it pulls that order back to seek liquidity elsewhere.  In this example, only one trading protocol is active at a time.  

The next stage of automation is what we call All Protocol Execution (APEX) strategy, in which the trader can take one order and engage with or expose it to multiple protocols at the same time, which mirrors how a human buy-side trader works. 

Explain how the buy-side trader can automate multi-protocol trading across multiple venues?

VV: Within FlexFI for example, we have FISOR — Fixed-Income Smart Order Router, which we envision as a container for trading workflow automations. FISOR taps into pre-trade liquidity, can engage with all execution protocols, support defined automation strategies and help traders in their quest for liquidity and best execution.   

What’s more, with the upcoming APEX strategy, FISOR can expose a single line item a trader is working on to multiple protocols at the same time. As an example, a $10 million corporate bond ticket parked in the APEX strategy can be exposed to a dark pool, while simultaneously it can respond in the all-to-all market and preemptively sweep incoming click-to-trade liquidity. 

How can the EMS address pre-trade liquidity analysis and link that to execution quality?

VV: We’ve invested in building a comprehensive pre-trade data lake that captures tick-by-tick data with tens of millions of data points a day, accessible to an API and amenable to analysis. That is the Holy Grail of data in fixed income! 

There is an opportunity for the EMS to unlock the intelligence in this pre-trade data lake. One potential use case – dealer selection — will help the buy side trader conduct an RFQ on a venue, identify which brokers showed them good prices in the past, versus others that have not shown them prices, or do not have an axe in the bond. Or the buy-side can run sanity checks to analyze the performance of brokers offering them prices. For example, if a particular dealer streamed prices five days in a row, but the dealer wasn’t in the top five for an RFQ on the bond or did not trade, it raises a flag. All this intelligence is untapped now and we are building out these use cases.