Among the various protocols that exist within fixed income – including request for quote (RFQ), request for streams, central limit order books, portfolio trading, periodic auctions, request for market (RFM) and voice – panellists discussed the optimal mix of protocol innovations to achieve best execution.
RFQ was noted by panellists as being the most dominant protocol currently used in fixed income, while also highlighting that voice is still a major part of the market.
Speaking on the decision process related to protocols, a buy-side panellist noted that if were up to funds, electronic RFM would be the chosen protocol in fixed income. Compared to straight through processing it is less work, argued the panellist, further stating that RFM instead increases competition, allowing market information to be weighed, and the ‘winner’ can deal with the trade.
Looking at innovation, a panellist noted that emerging market trading and interest rate swaps is experiencing a market development towards RFM. However, noted that RFQs are still a business model for cash bonds in credit and rates.
Another buy-side panellist expressed frustration with “giving away information and not getting anything back” when using RFQs.
“When choosing the best protocol, we consume the majority of the stream axes into an order management system and that gives you a great technical picture before you trade. If I look back 10 years ago, when you weren’t too sure how the market is, now it is pretty obvious if you are buyers or sellers and you can take that information and decide whether to do a RFQ or portfolio trade, etc. This really helps inform decision making,” noted one panellist.
With a transition away from RFQ, panellists were asked how this will impact best execution responsibilities. With the improved data the market has, one panellist noted that it is important to take the sufficient steps to ensure best execution.
“I would be concerned about TCA going away from RFQ in the current market environment. In the future market, assuming we will establish a well-functioning consolidated tape, where we can go analyse our trades, that will help things. Today, sometimes you have to accept some market leakage to prove that you have best execution, however, a consolidated tape could help tackle that problem,” concluded one panellist.