Increasing regulatory pressures and bank balance sheet constraints have led to an evolution in the fixed income market over recent years. With MiFID II poised to hit the European market in 2018, market participants had plenty to discuss at the Fixed Income Leaders Summit in Boston this year.
The day before the conference officially started, a ‘platform evaluation day’ was held for buy-siders with the aim of providing clarity on the multitude of fixed income initiative offerings. Incredibly, there are now more than 100 platforms available. This number is increasing.
According to those at the conference, the mass of fixed income platforms is only leading to increased fragmentation making it difficult for bond traders to source liquidity and execute trades.
Speaking at the conference, John Adams, global head of product strategy at Portware said there is “room for innovation but not proliferation” in the fixed income initiative market.
One panel of experts agreed that firms simply do not have the technology budgets to connect to all of these initiatives. It was suggested, therefore, that platforms adopt an all-all nature to ensure companies do not need to connect to multiple platforms to find liquidity.
Chip Bankes, head of trading at Loomis Sayles, explained to delegates that the barriers in trading bonds “come down to nonconformity of connectivity”.
He said: “From a budget standpoint, it’s difficult for Loomis Sayles to link to all of the platforms. An all-to-all platform where all participants can connect is [what is] needed.”
The panel acknowledged that the ability to access the market with consistency across venues and platforms is key for connectivity.
Sam Priyadarshi, head of fixed income derivatives at Vanguard, told the panel certain firms don’t have access to certain markets and “larger clients have better liquidity and therefore better prices.”
A prevalent theme, though, was on improving connectivity between platforms and initiatives to benefit the overall network for bond trading.
Algomi’s chief executive officer Stu Taylor expressed interest in working with fixed income initiative Neptune to improve connectivity in bond markets.
Taylor made the comments to Neptune co-founder Sassan Danesh during a panel addressing liquidity challenges in the fragmented bond market.
He said: “[Algomi] are interested in working with the Neptune group to connect with EMS systems, which makes sense to me.”
Danesh nodded having heard Taylor’s suggestion and told delegates on the panel: “The area we are involved in is looking at that pre-trade data in order to locate counterparties for those looking to trade. There are many liquidity pools and we need to figure out how to aggregate them and make that the focus.”
Moderator of the panel and chief executive at ViableMkts.com Chris White added: “The solutions most dominant moving forward will be those which practice this religion with other solutions.”
Fixed income, currencies and commodities (FICC) revenues in the first quarter this year have plummeted 49% since 2011, amid the slowest start to the year since the financial crisis.
As firms battle with increasing costs and declining revenues, fixed income headcount reduction has become frequent news in the industry. However, panellists agreed personnel are more important than ever for the future of the bond trading desk.
Ensuring trading desks have people in the right roles with a multitude of skill sets providing different perspectives, is now considered imperative when dealing in a fragmented market place.
Irina Isaakova, vice president at TD Asset Management stressed the importance of human capital to delegates at the event in Boston.
She said: “I need to make sure that I have the right people, with the right skillset, in the right roles - I am also a strong believer in specialisation.”
John Adam, global head of product strategy at Portware, echoed Isaakova’s thoughts:
“If you can be different in your thinking, you will find yourself with huge opportunities. Having a diverse team with a different perspectives means you can act immediately taking into account everyone’s view on the team.”
Bad Bond Data
Trading desks are now challenged with obtaining and consuming data, which is described by panellists as ‘imperfect’.
It was agreed on one particular panel, that imperfect bond data and the need to analyse it, is significantly reducing a trader’s ability to decide quickly on whether to execute a trade.
Buy-siders say ‘holes’ in bond data are preventing traders from being ‘opportunistic’ when executing trades.
Zack Ellison, director of US public fixed income at Sun Life Asset Management, explained that when looking at bond execution, immediacy is key.
Ellison noted that banks with their own fixed income indices are “wasting valuable time”.
He said: “The biggest problem is bad data. If the data can get cleaner and your best people are not spending their time analysing that data, you can then think of the bigger picture.”
TD’s Irina Isaakova added: “Traders are not dealing with perfect information, so focus and attention to detail is needed to analyse the information and make decisions.”
Another panel which delved into the effects of MiFID II on fixed income, raised concerns about the level of ‘technological resources’ available at regulators to handle the influx of data, post implementation.
Mayra Rodriguez, compliance expert and principal at MRV Associates explained: “It’s a learning curve for the regulators, and they are learning they don't have the technological resources to keep up with the market.”
Firms must implement MiFID II by January 2018, and there is an industry wide consensus that the rules will likely bring ‘unintended consequences’ to fixed income.
The recent Brexit vote in the United Kingdom has further complicated matters since the conference took place. Even before this, the industry was visibly worried about the implications.
Increasing regulatory pressure amid slowing liquidity and an overwhelming amount of initiatives all claiming to “solve” such problems, could see the themes from this year remaining prevalent at next year’s event.
It’s clear that connectivity, which was perhaps the most dominant theme at the conference, could be the answer, but the market has yet to decide which “connections” will prove the most valuable.After all, if standardised connectivity is achieved, a more established bond network could lead to an easing of regulatory pressures and simplified methods of sourcing liquidity.