Hayley McDowell: What does Euronext’s recent investment mean for Algomi?
Stu Taylor: This is the first time Algomi has completed a strategic tie-up and I don’t think it will be the last. Since inception we’ve been building an ecosystem that allows event-based information in the market, not just prices, but more private internal data such as that gleaned from phone-calls, client holdings, enquiries or maybe insight from unfilled allocations on new issues, to be used by market participants. It started with our Synchronicity product for the banks, where they use their own data to make smarter trades. We then extended into the buy-side with Honeycomb. What we hadn’t done was connect the banks on an inter-bank basis – essentially evolving the concept of the traditional inter-dealer broker.
With Euronext, we wanted to reinvent the concept of the inter-bank model by using the data signals Banks are already exchanging with clients over Honeycomb. With the banks’ permission, by routing the collective data signals from banks, we are able to make it apparent to traders when it is appropriate to consider using the inter dealer channel and when not. Euronext then provides a regulated execution environment for these smart interbank connections. As such, the market structure is preserved but the market size fort interbank matching is expanded because Euronext can handle soft information insights and doesn't require a firm price/size order in the way that traditional inter-dealer brokers do. As buy-side clients do not often give firm orders easily, the bank cannot often leverage the inter-dealer market market without underwriting it with their own balance sheet. The Euronext solution relaxes this requirement making the interdealer channel much more applicable. Secondly, there is a systematic trust issue. If a trader goes to an inter-dealer broker, how do they know it won’t be shown wildly across the market? Our partnership with Euronext places a regulated exchange group in the middle of the transaction - it’s a way of navigating the market in a pre-determined and discreet manner with minimum information leakage, for a buy-side firm to deal with a bank and get the client trade done.
Once you start to think about data signalling, we don’t ask banks to share their data because they wont. Our approach is to signal to the market that the data exists and where it can be found, rather than handing it over. Going down this route introduces the ability to think about private data in a new way. This year, Algomi will be bringing new, never seen before data sets into the market.
Commercially, we signed a deal with Euronext in Europe and the banks feedback was very supportive. They particularly liked that it preserved market structure, minimised information leakage and it was very innovative. Off the back of that, Euronext approached us and said they would like to take this global. It wanted to become the global partner for this, but look for other exchanges to operate in the regional markets. As we are strategically aligning ourselves, Euronext decided to take a minority stake in Algomi. For us, this completes a vision and gives our client base certainty that as Algomi is now backed by a major exchange group, we arehere for the long run.
HM: Do the growing number of initiatives in fixed income help or hinder the market?
ST: In one sense, I am a massive fan of these initiatives because it’s innovation at a rate that we haven’t seen before. The market is clearly not functioning and there is no shortage of ideas to deal with this. Around 20 years ago we had a huge flutter of new e-platforms and the larger platforms became the incumbents, while others failed. Throughout the 2000s it was a quieter period and there was not a huge amount of innovation. What we are seeing now is a wide range of alternatives coming out and some of those are beginning to stick. For me, the innovation should certainly be applauded, but is it all going to work? Probably not. But at the same time if we don’t try and solve the problems then we will end up in a worse place. Clearly there is a lot of filtering the banks have to do to stay on top of all of these initiatives and decide which ones to back.
HM: How has regulation affected balance sheets and the concept of the ‘virtual balance sheet’?
ST: Firstly, the regulation has cemented balance sheets being more focused on high turnover bonds. Typically, a bond will trade very actively post-issue, but within a few weeks, attention turns to the newer recent issues and the bond liquidity dries up dramatically – often until end of term. Banks are chasing the recently issued bonds electronically. In that sense the balance sheet is still there and you can still get large amounts of risk being applied, but the range of bonds you can trade this way is a small subset of the total market. In terms of the virtual balance sheet, some banks do this better than others. Banks are all accustomed to advertising their real balance sheets, but how do they advertise their virtual balance sheets?
That’s really where Honeycomb comes in and sets itself apart from other platforms out there. It is a standardised way of displaying virtual balance sheets and if your clients know you have the balance sheet, virtual or real, they will come to you. We are seeing ever-increasing usage of this - the banks now collectively send about 110,000 messages a day demonstrating their virtual balance sheets in a much wider range of instruments than their risk balance sheets can support. So we are starting to see a systematic publication of virtual balance sheets from banks that are on the Honeycomb network at the moment.
HM: How is technology helping change market structure and liquidity?
ST: You really need to ask the question, what’s really new? I think technology fails to do that when you don’t bring anything fundamentally new to the market. A lot of the e-platforms that have been presented are not bringing any fundamental new liquidity to the market. If you look at what happened in equities, it exploded because of high frequency trading. That brought a new type of risk and trading approach with new counterparts coming into the market. Therefore the market structure evolved with it. In FX, you had democratisation with retail investors trading effectively - again new liquidity coming in.
In fixed income we haven’t had anything like that and we haven’t been very good at bringing new people into the market, it’s still very institutional. Algomi’s answer to that is we are bringing you information on events you haven’t seen before. In most cases, a lot of the platforms haven’t solved that problem, they have just put buyers and sellers together in a different way, but it doesn’t bring them to the market. Other interesting innovations can be seen in blockchain, which does involve new information. We are also waiting for some more significant innovations on the buy-side as ultimately we believe they will play a big role in the solution. Some major asset managers have started to develop new tools and if the buy-side does this en masse we could see significant new liquidity. Technology can certainly help with that.
HM: How do the liquidity challenges differ in markets? Is this a challenge or opportunity for providers?
ST: Liquidity problems will be solved by a variety of methods, there’s no single bullet which solves it all. In the more liquid markets, e-trading is the way forward. It’s efficient, quick and provides best execution. The most liquid of the bond markets - the US treasuries market - around half of the client market is using RFQ. So we think looking beyond liquid assets at corporate bonds for example, the liquidity challenge is about identifying buyers and sellers. Without that, it doesn’t matter which protocol you put in the middle, you have to attract the buyer or seller into the market in the first place. The focus needs to shift towards how we achieve this.
It can be done through information, but the ecosystem is a complicated thing. At the heart of it is figuring out who the other natural side is and what is the best way to get to them. Once we see that in fixed income, some of the initiatives could be backed into FX and equities. Equities has shown the world HFT, but they haven’t solved this for less-liquid markets. There will be an interesting collision between the two and we think Algomi will play a part.