Increasing connectivity to trading platforms is the most urgent priority facing the buy-side over the next 12 months with regards to fixed income trading, according to theTRADEnews.com’s June poll.
When asked what the buy-side should prioritise for their fixed income trading over the next year, over half of respondents (53.85%) selected the need to increase connectivity to trading platforms over gaining access to more complete market data (21.15%), reducing exposure to illiquid instruments (13.46%) and working more closely with brokers (11.54%).
According to Nick Robinson, head of trading, fixed income at Schroders, the evolution in the process by which both swaps and cash bonds are traded is a fundamental reason for the heavy emphasis being placed on the need for increased connectivity. “There is now a requirement to connect to more than one SEF or to an EMS type SEF aggregator,” he explained. “In cash credit bonds, crossing networks are looking to gain traction and increasing numbers of buy-side trading desks are starting to connect to these platforms.”
However, he was surprised that market data access has not come out on top, citing the “opaqueness” of cash corporate bond markets as a considerable problem. “Access to more data would help us undertake better cash bond transaction cost analysis and would aid the take up of crossing networks by making the establishment of a reference price easier.”
Nevertheless as Sassan Danesh, managing partner, Etrading Software, points out, the issue of market data access is heavily linked to the need for increased connectivity to trading platforms.
“This is partially a connectivity issue again, no individual platform has complete coverage of the instrument set, the asset classes and the products, therefore there is a need to connect to lots of them in order to aggregate them and build a complete picture of what’s going on. There is a clear link between connectivity and market data because of this.”
On hearing the high numbers calling for increased connectivity to trading platforms, Danesh explained that he was “not surprised - recently we’ve been having a lot of discussions about the issue of connecting to the new trading platforms and initiatives that are emerging. What we’re hearing is that one of the ‘pain points’ is that all new initiatives are electronic and that’s quite a challenge for the market place.”
As the buy-side moves towards a more electronic world in credit markets, Danesh emphasises that the industry is really “only at the beginning of that journey.” The challenge of evolving both buy-side and sell-side systems towards these new electronic initiatives is a problematic but crucial one. The Co-Chair of the FIX Trading Community’s OTC Products Committee was also keen to share a possible solution to the problem, highlighting the need to create a market structure which unifies and aggregates the liquidity from a mixture of all the most successful emerging electronic enterprises.
Rather than simply backing “one or two initiatives,” Danesh recommends working towards unifying the fragmentation of the market through standardised connectivity. “We’re actually having that discussion right now with both the buy-side and the sell-side,” he explained. Ultimately, he believes the fundamental question facing fixed income traders is whether or not it is possible to build a network based on open standards, utilising industry agreed workflows for inventory distribution with a security and permissioning model on top. There has been significant interest from market participants eager to see whether such a mechanism can be set up.