Seizing the future of fixed income markets
There is no turning back the tide on institutional demand for efficiency in capital markets. Charlie and Ellie from our business development team look at why big tech changes in fixed income are key for the next wave of innovation and the important place a trader holds as the technology for the entire trading and operations lifecycle continues to evolve.
By Charlie Gibson and Ellie Brennan
There is now a greater need than ever for efficiency and data protection in the corporate bond market. Information leakage can be very damaging whether you’re looking to buy or sell, especially in an illiquid market like corporate bonds. There are very few (if any) trading desks that use a single piece of technology anymore and tech-driven innovation is driving increased use of automation and information flows on both sides of the market.
The widespread adoption of e-trading and new, competitive market models has brought better execution and reduced costs to many asset classes. We’ve experienced first-hand the growth which has arisen over the last five years. This next phase – the digitalization of markets – is a big opportunity; data remains king but arming both sides of the market with stronger connectivity to liquidity and the right tools is crucial for the future of credit markets.
The rise of automation
The most obvious trading technology trend in the last few years is automation which works well when markets are stable. On the buy-side, auto execution tools are great for firms who have a high number of trades to execute at once and need to move risk quickly. On the sell-side, you’ve got the rise in algos, which automate pricing. When markets are volatile, such as during March 2020 or, more recently, during times of political unrest, traders need the right mechanics to optimize their strategy. This is why we focused on full data security and building intelligent pre-trade analytics. We provide traders with a unique tool we call the ‘Market Landscape’. This consolidates all the other pricing points around it, creating a massive and secure data set. We paint a picture of where liquidity lies, so our clients get an immediate grasp of this before showing their hand to the market.
A view from the trenches
So where is the trader in all this? In a market where human touch has been so significant, technology is playing a crucial part in the evolving liquidity dynamics. Up until now only a small part of the market has been penetrated electronically. RFQ based protocols still make up over 60% of e-trading volume* and 1/3 of the market said when trading electronically via disclosed RFQ they had concerns regarding information leakage more than any other execution method – even trading via phone**.
Complex products, like bonds, are still early in their evolution of automation, and with the territory of complicated asset classes and less liquid products traders will always need to understand the market, be creative thinkers and work under pressure. That’s not going to change anytime soon. In recent years we’ve seen a traders’ skillsets evolve as they consume more data, utilize the power of interoperability and interrogate analytics.
Trader’s need for data is a core part of LedgerEdge. It’s a huge step-change for a bank to be able to run, for example, a search as a powerful sales tool to find matching liquidity (such as client orders or holdings) to help their end client. A trader knows when it’s worthwhile to take a risk, whereas a machine might not. With LedgerEdge, we are enabling e-trading in a formulaic and secure way, allowing traders to use automated tools to identify worthwhile opportunities, even if they contain an element of risk. In other words, we allow computers to talk to each other to discover who has a genuine opposing interest to support a trader’s strategy. Our smart contract technology can make sure that customers are not revealing interest to anything that isn’t real. In illiquid products this targeted electronification will remain key to helping traders manage data.
Embracing new tech is crucial to generate alpha
New trading tools and automation are here to stay. With it the technology has arrived so that it can get information in front of the trader, to emulate a phone call, so that they can direct an order and reduce data leaks, taking more from the market. This is exactly why we set up LedgerEdge. What we’re delivering is exciting because it allows the traditionally closed and illiquid corporate bond market to open up. We are working with our clients and other technology providers and seeing first-hand how confidence is building across the industry when it comes to trading in an entirely new way.
Finally, we have technology that can keep data secure, giving both sides of the market more certainty when making decisions. From there we can start to give users competence to share their most sensitive information, their holdings, using intelligent reveal conditions.
Each day traders are battling against different bugbears
We both came from fixed income venues, specializing in distinct types of protocols, so we know well what the market needs for traders to target the best route and achieve their goals. For LedgerEdge, this is not proof of concept work. We took a consultative style with different trading teams across different asset classes to discuss their workflows and pain points, which helped us define the product. The level of cooperation we’ve had from both sides of the market is integral to where we are now, on an exciting path teaching our customers a brand-new way of trading and the power our unique protocols can bring. This process will continue, and we are constantly gathering feedback from our clients following our recent UK pilot launch because we know well from a traders’ perspective, how even slight changes can make an enormous difference to their ability to execute.
It’s never been more important for a trader to have the right tools to achieve best execution. Innovative technology is bridging the old and new trading worlds together and we look forward to getting to a point where that brings significant cost saving, better execution, and genuine business benefits to our customers. What’s most important as we bring momentous changes in technology to the market is continuing to develop trust with our clients, without which the system will never work – without trust traders don’t have access to enough data and can’t make the right choices. Even with all the benefits that technology can bring, we still need the human element.
*Coalition Greenwich (a division of CRISIL), February Data Spotlight: U.S. Credit Trading, 15 Feb 2022.
** Coalition Greenwich (a division of CRISIL), All-to-All Trading Takes Hold in Corporate Bonds Q2 2021, 19 April 2022.