An interview with managing director, global head of business development at Tradeweb, Simon Maisey.
What are the major changes affecting fixed income as an asset class?
There are two major themes affecting fixed income as an asset class today. Firstly, an increased demand for pre-trade information and liquidity-discovery tools, as firms endeavour to execute their business strategies more efficiently. Secondly, there is an operational challenge with demand to develop processes and systems as MiFID II comes into effect, competing with pressure on costs. With the latest phase-in proposals from ESMA, market participants need to ensure they have a solution that provides complete clarity and certainty at each stage of their conformance process. We can help, for example, where the pre-trade certainty check with clearing members, which is mandatory in the U.S. but still optional under EMIR, is already incorporated in the Tradeweb workflow. So that when it becomes a requirement under MiFIR and the implementation of the trading mandate, our clients will be fully prepared.
How can firms overcome the operational challenges as a result of MiFID II?
To avoid operational uncertainty, the majority of our clients are already ahead of the curve when it comes to getting ready for the mandatory clearing of interest rate swaps. With operational processes riddled with so much complexity, it is easy to see why the market has moved early. At the end of the day, all clients want is to have some clarity around what they have to do now and in the future, instead of being left with grey areas in-between that create uncertainty. When executing their trades, Tradeweb has seen an increasing amount of buy-side firms opting for an automated approach for ‘low-touch’ trades, so that they’re able to focus on higher-value business. Through integrated connections to our platform, buy-side execution desks can use our rules-based trading functionality to automate large numbers of smaller-sized trades, while preserving the integrity and flexibility of the RFQ protocol. We’ve seen a great deal of growth in this functionality in terms of volume and increasing sizes across securities, and more recently including interest rate swaps.
How will MiFID II shape the future of transaction cost analysis (TCA)?
Regulatory reform and the changing landscape of liquidity have led to a shift in focus to best execution and transparency. Investment managers now seek to monitor and quantify their ability to provide an optimum service for their clients. The regulatory requirements to demonstrate and validate best execution have also increased. These are driving a demand for detailed transaction cost and trade execution data. One of the biggest challenges facing firms is the multitude of data which needs to be obtained and consumed, especially in non-continuous markets like fixed income. Tradeweb benchmarks trades in our TCA offering to a continuous and consistent composite. We spend a lot of time examining this composite and ensuring it’s a valid representation of where trades could be executed.
How can monitoring trading performance work as a business development tool and not just a regulatory one?
Monitoring trade performance is not just a compliance requirement, but can also be developed into a tool for buy-side traders to better understand how they’re executing trades within their business strategy. A trader can discover the impact of decisions that have been made aggregated across all their activity and that information can be drilled down into individual trades. Monitoring trade performance can provide direct measurable feedback on these costs and firms can use this to improve the way their business is executed.
What services does Tradeweb offer to assist with MiFID II?
Tradeweb is a regulated MTF trading venue and has been since the implementation of MiFID I. It continues to be a regulated venue and we have designed trader solutions ready to be deployed throughout ESMA’s ‘phase-in’ period.
We do not believe in adopting a sticking plaster solution – a system needs to be designed that works five years from now. Only then can firms have the full confidence to carry on with the day-to-day running of their business, without the worry of additional costs and disruption to their operations or risk being non-compliant each time the calibration tests change.
Tradeweb has seen a 131% uptake in use of our axes functionality across Europe since the beginning of this year. Pre-trade axes are used to highlight the market makers who have indicated they have a specific interest to buy or sell in an instrument rather than a neutral market bid-offer stream. Tradeweb’s European government bond platform alone sees 20% of its daily activity from buy-side transactions with axed-dealers, and around €2 billion traded daily on dealer axes.
Effective trade execution
We are comfortable that ESMA’s latest inclusion of a collection window for RFQ will allow this protocol to continue to function and facilitate an efficient risk transfer method. In addition, we recently developed FlexRFQ, a tool which allows our clients to launch an RFQ to up to six dealers at a time, replacing those who do not respond with new dealers while the request is live. The new protocol significantly reduces the risk of trading information leakage, which can occur with medium to larger trades being sent to the entire market.
As mentioned previously, a specialist fixed income tool has been developed for TCA to measure trades against a high quality continuous composite. It allows our clients to see the percentage composite of bid offers on spread accounts for liquidity of different instruments. Non-Tradeweb trades can too be consumed and give a consistent TCA across all activity. Users will also receive data on prospective transaction times and likelihood of executing a specific trade on Tradeweb, which also feeds into their best execution requirements.
Furthermore, Tradeweb will be registering as an APA to enable our clients to leverage the process and infrastructure we are building as a regulated venue in order to satisfy their own pre- and post-trade transparency requirements. We will offer a range of transparency tools and services reflecting the different needs of our clients.
Our clients understand the importance of MiFID II, and our menu of different tools is leading to many further discussions on how these can work for each firm. We understand they have different requirements in terms of their workflow infrastructure and stages of processing, so we offer a range of methods of connecting to us. Through an easy-to-deploy GUI or via integration directly or through commercial OMS providers to our system, our clients are benefitting from Tradeweb’s flexible and holistic approach to connectivity.