FILS 2022: Disrupting Legacy Infrastructure with Innovations in DLT
The LedgerEdge team reflect on our biggest takeaways of the FILS 2022 Nashville event, from the power of tech to mitigate market strain to interoperability.
Last month, the LedgerEdge team headed to Nashville for the annual Fixed Income Leaders Summit. We set up a booth with our platform ready for demonstration and spoke to participants from the buy- and sell-side about our favourite subject – electronic trading platforms. We had some great feedback and lively discussions, and if we saw you there, thanks for stopping by!
On day 2, our CEO and co-founder, David Nicol, spoke at a couple of panels. The Innovation panel with Ruben Costa-Santos, Head of Multi-Asset Analytics at Virtu Financial was chaired by Michael Koegler CEO at Market Alpha Advisors discussing the latest innovations that will improve the way bonds are currently traded. Later that day he joined “A day in the life of a Credit Trader: How is auto trading and electronic trading evolving in the credit marketplace and how will the trader’s role adapt and evolve?” which was moderated by Dan Barnes, Editor of The DESK. David discussed with his fellow panellists Stuart Taylor, MD, Head of eTrading at MUFG Securities, Karl W Lohninger, Executive Director – Corporate Credit Trader at JP Morgan Asset Management, Matthew Coupe, Director Market Structure at Barclays and Brendan Sheehan, Head of Fixed Income ETF Trading at SIG how technologies like the LedgerEdge ecosystem will disrupt traditional bond market infrastructure and trading dynamics over the next 5 years.
Here are our key takeaways from his panels and this year’s FILS event.
New technology is coming at a crucial time for credit markets
The corporate bond market is under pressure from current market conditions. The corporate bond trading environment we’ve experienced since the global financial crisis is changing, which was the single biggest thing we heard at FILS. High-yield corporate bonds are being sold off as interest rates rise, bringing a surge in borrowing costs and rising fears of recession. The Federal Reserve’s new Corporate Bond Market Distress Index is indicating that investment-grade bonds are under significant stress, too.
This strain is hitting liquidity, making it harder for traders to execute under the traditional risk transfer model. Emerging technology like DLT comes at a critical time and can address this fundamental liquidity challenge – one that is in part a result of the way the market itself is structured.
For example, executing large corporate bond orders today remains to an extent a leap of faith. A trader has to signal intention to the market to get a deal done. This often results in poor prices for the trader, who then seeks to limit such risk by only discussing an order with a limited number of sell-side contacts. Overall liquidity suffers as a result, and during times of market stress, like now, the effects of this liquidity drain become even more pronounced.
Innovation is creating bigger opportunities
The liquidity challenge is nothing new. What is new is cutting-edge technology that allows it to be properly addressed for the first time. Smart contracts that sit on a distributed ledger gives our customers the ability to input anonymous bids using smart protocols which only reveal certain information, such as order and pricing, under specific conditions. In other words, it removes the need for that leap of faith. Seriously, there is no more fishing in the dark!
Being able to control who gets to see an order under what conditions will transform the bond market as we know it. The market impact of each bid is vastly reduced as inventory data only reaches traders with compatible bids. Traders can therefore collaborate without having to operate on blind faith – they see only what they need to see, and their own data is kept secure because others are operating in the same way.
This security increases the addressable market. More data being shared means even traditionally illiquid orders can come to the market. Simply put, if traders can trust that their information is safe, they will be more willing to put it out to the market. DLT allows us to increase opportunities in new, niche markets and encourages liquidity in securities that don’t usually trade. Excitement about this aspect of our ecosystem was another thing we heard a lot at FILS, excitement we think is justified.
We need to meet traders where they are now
“Interoperability.” This word is getting overused to the point of losing meaning, but the concept it represents – one of openness and collaboration – truly matters. There are over 160 fixed income trading venues for traders to navigate, according to Alignment Systems. Add to that order and execution management systems, data and portfolio management platforms, and internal systems. It’s a fragmented market to say the least.
Traders and trading desks don’t use a single piece of technology anymore. This fragmentation makes it essential for new players like us to be able to integrate our platform into the numerous and important OEMS traders use to ensure this new way of trading feels familiar and usable across the market. We want our customers to feel like using LedgerEdge is as familiar as using any other trading venue out there, even if what you find underneath the hood is entirely new.
Where innovation is happening disruption will occur. New technology is crucial for the future of the credit market and it’s coming for the corporate bond markets. This is a great thing, and we are excited to lead the market as the evolution takes hold.