What are the benefits of using an execution management system (EMS) for fixed income?
An EMS can offer connectivity to allow traders to manage and execute their order books electronically; however, that is not where the true value is realised. Unlike other asset classes, fixed income orders tend to be larger and even if they’re sliced into the market, each placement will usually fill with a single execution. The speed and processing power that allows an EMS to consume thousands of executions for every order is not applicable, but that capability within an EMS to manage large volumes of data to support fixed income trading is where the value begins to surface. The EMS can aggregate fragmented sources of liquidity and price in real time and align them with orders to help identify when to trade, how it should price, and where it should trade. These insights are captured, maintained, and combined with historical trading activity, which produces a robust pre-trade decision support tool that can ultimately be leveraged to drive automation.
How do you expect changing regulation around what’s classed as a venue will impact EMS adoption?
I am of the mindset that an EMS is not a venue, but rather a software product that introduces workflow efficiencies and connectivity to streamline processes that have historically been done manually. That being said, if new regulations are imposed there will be a need to ensure compliance with any new requirements. This should not impact EMS adoption unless those regulations impede innovation.
It is not clear to me what the proposed changes intend to achieve. There are many definitions in the Securities and Exchanges Commission (SEC) and European Securities and Markets Authority (ESMA) proposals that are somewhat vague and may or may not apply to an EMS. If there is a need to enact changes that can better protect investors that is fine, but I would rather see proposed changes that were specific to an EMS as opposed to simply reclassifying it as a different type of entity altogether. We are not a venue and have no aspirations to become one.
What role do venues play in the fixed income market; is this changing?
Venues are entrenched in the fixed income landscape having essentially been the starting point of electronic trading in fixed income years ago. Newer entrants into the market have established footholds by specialising in specific trading styles, while regional-specific venues cater to specific markets. Over time the number of venues has increased and as asset coverage expansion has caused overlaps, it is not as simple to assume that all credit orders should go to one venue and all rates to another. The venues are offering newer APIs that enable their streaming data to be consumed externally and sanctioning control of trading outside of the venue. This reduces the need for a trader to pivot between systems by consolidating the workflow into a single interface and helping traders identify the best venue to interact with.
Are the sell-and buy-side pushing for bilateral trading connections? Why?
Clients and dealers see bilateral trading connections as a valuable way to augment trading workflows. The sell-side sees this as an opportunity to expose liquidity, targeting specific clients based on their relationships with those clients. The obvious goal would be to increase transactional volume with those clients by enabling some flow off venue resulting in potential cost savings.
The buy-side wants to see exposed liquidity linked with their orders as another tool to help drive decision support. While connecting directly, there is an expectation that they should see better pricing tailored around their relationship with a given dealer. There is also the inherent fear of information leakage which is one of the reasons why even with the increase in electronic trading, voice still plays a larger part in the overall traded volume. Connecting directly to dealers will mitigate some of those fears on orders where the buy-side trader wants to limit exposure.
Why is data in the fixed income markets so fragmented and what does this do to its cost?
Unlike listed assets that execute through exchanges and market data providers enabling feeds from those exchanges, fixed income does not have the benefit of a standardised method of data consolidation. The view of data for an instrument in one venue can differ from another based on the activity in each of those venues. Trades executed off-venue may not be reflected.
Aggregation of data can solve this, but the sources will, in most cases, charge additional fees. Keep in mind that even in the listed asset space there are fees for any exchange that is subscribed to regardless of a chosen market data provider. With fixed income selectively choosing data sources that can provide decent even if not all coverage it is a starting point to keep costs down with the ability to add or remove sources to find the set that gives the best coverage when aggregated together.
Implementing a consolidated stream of pricing is a great indicator of liquidity and price, but it is only part of the equation. A TRACE price that has not updated in a few hours does not mean that there is no more liquidity, just that no recent trades have occurred. Having access to a book of bids and offers gives a fuller picture if there is possible liquidity to interact with. This is where data providers who aggregate quotes come into the picture as well as direct dealer connections to build up a synthetic book of pricing.
How have the fixed income markets embraced automation and where do you see this evolving?
Venues offer auto-execution strategies that initiate and complete RFQ workflows executing at the best quoted price as an example. Taking that a step further, as a trader determines the conditions that make the most sense for using auto execution, those conditions can be converted into systematic rules within the EMS that autoroute to a venue offering a no-touch solution. Clients will typically adopt automation with higher liquidity assets such as treasuries as a starting point. The ability to leverage real time and historical datasets within rules to systematically find actual or potential sources of liquidity will allow for the enablement of automation with less liquid instruments. Will this eliminate manual trading altogether? No, but that is not the goal. By identifying orders that can be managed through automation, traders are freed up to focus on the more complex high-touch orders.
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