Convictions outsources dealing in bond liquidity dearth

Independent investment manager Convictions Asset Management said the challenge of locating fixed income liquidity was behind its recent decision to outsource execution to BNP Paribas Securities Services.

Independent investment manager Convictions Asset Management said the challenge of locating fixed income liquidity was behind its recent decision to outsource execution to BNP Paribas Securities Services.

Convictions, which manages €628 million in assets under management, transferred the sourcing of liquidity and trade execution to BNP Paribas Securities Services in Q1.

“We found fixed income to be the most difficult asset to trade in terms of finding liquidity,” Sylvain Afriat, chief operating officer at Convictions, told “Using BNP Paribas Securities Services, we can reduce the time our team spends on hunting for liquidity manually, allowing them to focus on making investment decisions and adding alpha.”

When searching for fixed income liquidity, buy-side firms typically phone market making brokers to request an indicative price for the instrument they want to trade. Electronic trading venues such as Marketaxess offer trading in some bond instruments, but account for a limited share of overall liquidity.

Rather thanphoning each counterpart to compare prices for bond instruments, BNP Paribas Securities Services uses a system that polls broker quotes automatically, which Afriat said would help Convictions better meet its best execution obligations. The 40 brokers BNP Paribas uses on behalf of Convictions are pre-validated by the asset manager.

Fund managers at Convictions can send specific execution instructions to BNP Paribas if, for instance, they want to limit the number of counterparties the request quotes from in order to manage market impact for a sensitive trade.

According to Philippe Boulenguiez, head of dealing services at BNP Paribas Securities Services, close cooperation between portfolio managers and the execution desk is crucial to the firms’ partnership.

“Our 40 dealers are professionally qualified with a broad and deep knowledge of markets. They are organised by instrument within the asset class they trade, e.g. credit or emerging market,” he said. “Using their specialist knowledge, we can work with Convictions’ managers to review and understand their flows. This means we can devise and offer a specific trading strategy to ensure the best outcome for them.”

Post-trade analysis 

BNP Paribas Securities Services also provides outsourced dealing services to its parent company’s wealth management, asset management and Cadiz subsidiaries, using a total of over 180 brokers. The extensive number of brokers on BNP Paribas’ roster allows it to provide feedback to Convictions on its broker list.

From a post-trade perspective, Boulenguiez said his firm offered Convictions an audit trail of each entire order – including the time an order reached BNP Paribas and time of actual execution – a snapshot of the prices offered by other brokers in the same instrument at the same time, and a periodic analysis of broker performance. The money manager has outsourced its back- and middle-office functions to BNP Paribas for the last five years.

Sourcing liquidity in the bond market is poised to become even tougher following the introduction of new legislation limiting a broker’s ability to offer liquidity as they have done traditionally. Basel III – the latest set of guidelines for ensuring banks are adequately capitalised – will require fixed income dealers to collateralise the assets they hold on their balance sheet on a risk-weighted basis, while MiFID II will inject pre-trade transparency requirements for bonds upon its introduction in 2014-15.

“Given the size and the importance of all our clients, we have the opportunity to access liquidity that other firms often cannot,” added Boulenguiez. “Evidence suggests that the increasing revenue pressure mounting on the sell-side means they are continuing to prioritise their most important clients. This is generally measured by commission and/or turnover and means that small- and mid-tier buy-side firms can struggle to source specific liquidity, and therefore not get the best outcome for their clients.”