Article 1 of 3: The fixed income landscape is in flux. In this series of three blogs, I’ll explore the important trends we see dominating the fixed income space in the year ahead: technology, liquidity and operational efficiency.
After years of resisting innovation and the adoption of technology in the same way as other asset classes, bond investors are finally starting to move forward. Against this backdrop, the rise of new trading protocols and venues, and access to massive amounts of data, has made the market more complex in the short term.
Sourcing liquidity and executing bond orders efficiently has actually become increasingly difficult. There is more reliance on advanced technology to navigate an already fragmented market and to get best execution. The buy side is now in an arms race for talent, technology and operational efficiencies like never before.
The Technology Conundrum
When I joined the Cowen team in January this year, my first priority was to incorporate the right technology into our fixed income outsourced trading desk. In light of the market complexities, and in order to provide the best possible solution to our clients, it was vital that we went beyond traditional buy-side order management systems.
In conversation with David Tattan, Managing Director at TORA, I explore the technology challenges that fixed income traders face, and why a flexible and adaptable technology solution is essential in today’s complex, fluid fixed income market. David Tattan is responsible for European sales at TORA, the platform that underpins our outsourced trading desk.
Navigating the Maze
Many new platforms and protocols have emerged, generating voluminous and valuable reams of data that is increasingly being leveraged to enhance trade execution and liquidity searches.
Navigating the maze and corralling the information is no easy feat, especially for players whose pockets are not as deep as their larger counterparts. If they do not step up their technological game, they are in danger of falling much farther behind and losing their competitive edge,” says David.
One reason for the increasingly for the increasingly complex ecosystem is the depth and breadth of the global bond market, which is roughly three times the size of its equity counterpart. There are not only many more securities, but several either trade infrequently or are illiquid and are still negotiated bilaterally between counterparties.
This has meant market participants have to log into many different systems and bond platforms separately, make calls with individual counterparties and collect data from disparate sources scattered across the fixed income landscape. Moreover, often the data gathered from such a fractured environment can often be poorly structured and of variable quality, particularly for the more opaque, illiquid instruments, which makes it hard to analyze in systematic way. The result is that traders have lost time, money and equally as important extra basis points from not having a holistic view of the information needed to make the right investment and execution decisions.
The nirvana is to be able to source, process and aggregate data from multiple sources – electronic or otherwise – in order to gain more meaningful insights, access liquidity and achieve better bond pricing and best execution,” comments David.
This requires more than a tweaking of technology but a rethink in which tools can be best deployed to enhance the integral data consumption and management. Clunky legacy systems, albeit a well-known problem, should not be an excuse. These legacy systems simply cannot keep pace with the speed at which data is flowing into the market. Any thoughts of overlaying a piece of new kit on an existing system is also not a long term or even quick fix.
It has been well documented that fixed income technology is a generation behind other asset classes. However, in recent years, the pace has quickened with new innovative systems and process coming onto the market. While some firms have developed or acquired these products internally, others have turned to outsourced technology providers who work in partnership to find the best way forward.
The solutions needed to address these problems are not out of reach. In fact, an EMS (execution management system) and OEMS (order and execution management system) is a cost effective, efficient piece of technology that significantly whittles down the desk top real estate by offering the best of both worlds,” added David.
These two worlds combine portfolio construction, order management, compliance and operational controls along with data aggregation, decision support and analytics, automation and order routing/trade execution all in one place. Equally as important is that they are flexible and agile enough to adapt with the ever-changing environment.
Making the Right Choice
By bringing multiple trading platforms and global brokers into one platform, with a full suite of order allocation management tools and post-trade analytics, traders benefit from a single system for their trading workflows.
The solution needs to offer a single view of the fixed income market in one click and allow users to easily direct an RFQ to many platforms and brokers at once. In addition, the OEMS should offer a comparable bond tool, smart order routing, pre-trade risk controls, real-time position management, and P&L tracking in a single interface.
An OEMS such as TORA’s enables traders to better meet customer’s demands coupled with improved execution quality and sharper investment decision making. In today’s intensely competitive and regulatory burden world, firms need to have the right technology to differentiate themselves to stay ahead of the pack,” concludes David.
Although technology and data aim to make trading more streamlined and efficient, access to liquidity remains one of the biggest challenges for fixed income participants. In the next article of this series, I will dive into the matter of fixed income liquidity, and how we find the deepest pools.
TORA is the leading global provider of advanced investment management technologies supporting the full trading lifecycle. With a full suite of cloud-based SaaS-delivered execution, analytics and compliance tools, as well as order, portfolio and risk management capabilities and a global FIX network, TORA’s products are utilized by hundreds of the industry’s leading hedge funds, asset managers, proprietary trading firms and sell-side trading desks globally. With headquarters in San Francisco, TORA has over 250 employees across offices in Hong Kong, London, Jersey, New York, Romania, Singapore, Sydney and Tokyo. More information is available at www.tora.com
Cowen Outsourced Trading provides investment managers with a first-rate and cost-efficient solution for their global trading needs. The full-service offering is multi-asset class and differentiated by its transparency and level of operational support. Cowen’s Outsourced Trading solution is offered in the US through Cowen and Company, LLC, a registered broker dealer and investment advisor with the SEC, and a member of FINRA, NFA and SIPC, and internationally through Cowen International Limited, which is authorized and regulated by the Financial Conduct Authority (FCA) in the UK, and Cowen and Company (Asia) Limited, which is regulated by Securities and Futures Commission (SFC) of Hong Kong.
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