Buy Side Tackles Fixed Income ‘Best Ex’

Shanny Basar

Buy-side heads of fixed income dealing said they will focus this year on obtaining the data they need to evidence best execution as required under new regulations.

MiFID II, which came into force in the European Union in January, extended best execution regulations into the fixed income market for the first time. Firms now need to take all sufficient steps, rather than all reasonable steps to obtain best execution, and evidence this process.

A panel of fixed income heads of dealing of asst managers at the FIX Trading Community EMEA Conference in London yesterday said order management systems have not met the demand for data required to evidence best execution in fixed income, such as a snapshot of the market at the time of the execution.

One panelist said: “I am having to write an essay on each ticket to  to explain my thought process for my trading decisions to evidence best execution which is not ideal.”

Other methods of showing best execution being used include reviewing outliers and drawing liquidity trees on tickets which document available size and price.

However they also warned that fixed income cannot be pushed into the same transaction cost analysis model used in equities, as the same amount of data is not available.

“There can be only one trade in a bond in a week, and you are the one doing it, so how do you prove best execution ?” said one panelist. “Data will be the focus for 2018.”

Another panelist added that the last two years have been spent on being ready for MiFID II going live. “We now have opportunity to look at adding more value to trading, including reviewing vendors and technology,” she said.

Another continued that clients are increasingly using third parties to analyse execution, including fixed income. “The heads of dealing desks are now included on client pitches which shows the evolution in thinking,” added the panelist.

Consultancy Greenwich Associates said in a report, European Corporate Bond Trading: Impacts of MiFID II, that investors in the region execute more than half, 52%, of investment grade corporate bond volume trades electronically, compared to just 19% in the U.S. Greenwich said this was due to the more geographically diverse market in Europe, with language barriers and cultural differences making execution easier through a screen.

Brad Tingley, analyst on the market structure and technology team at Greenwich, said in the study: “As reporting requirements and new rules related to the trading of liquid securities take effect, electronic trading is likely to increase even further.”

MiFID II introduces pre-trade transparency and post-trade transaction reporting into fixed income for the first time.

“As a result of the stricter reporting requirements, electronic trading in Europe is expected to continue to grow, as it makes the reporting process much less onerous,” added Greenwich. “Voice trades must be entered into the system manually and timestamped, which if you’ve ever spent time on a trading floor, you know is an imperfect science.”

One UK investment manager said in the report: “The rules and regulations are becoming so aggressive [that] pushing stuff onto the platform is the path of least resistance. That’s the easiest of internal compliance and external regulators.”

A panelist at the FIX conference added that liquid instruments will be executed electronically, which will free up traders to spend more time on the more difficult illiquid trades.

The panel said requests for quotes are likely to continue to dominate in the short to medium term but dark pools, auctions and all-to-all trading have the scope to increase.

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