Fixed Income’s E-Trading Blues
Electronic trading of fixed-income products is becoming a two-edged sword for institutional investors who need to manage its ever-growing volume.
“One thing that we underestimate when we discuss data is that it is viewed as an unmitigated benefit,” said Alexander Sedgwick, vice president, head of fixed income market structure and electronic trading at T. Rowe Price, during a webinar moderated by Greenwich Associates. “In a lot of respects, we as an industry don’t talk about the challenges associated with that.”
The ultimate goal for any firm should be the ability to derive context, clarity, and actionable insights from the data, he added. “The last thing you want to be doing is getting information that you are not using. I think that’s the worst place that you can be.”
For T. Rowe Price, how it exploits its fixed income market data depends on the quantity and quality of that data.
For US Treasuries, the asset manager approaches it almost like a feedback loop due to the greater amount of available market data compared to the credit market, accord to Sedgwick. “We will look at our interactions with our counterparties; we will look at our interaction with different venues, and on a post-trade analysis we will take that into consideration the next time we choose to execute.”
Through all of the analysis, Sedgwick also suggested that firms keep cognizant of their available tools in their toolbox and understand the value that they bring.
The fixed-income market could view this growth of market data as the industry’s big data issue that eventually change the market as big data has changed other industry verticals, added Alastair Hawker, head of North American sales at Quantitative Brokers and fellow webinar participant.
“Maybe we are slower to evolve in the way that we analyze and use that data,” he said. “I think that is something that I hope will evolve a lot. It’s something that we here are Quantitative Brokers are trying to help our clients with that sort of analysis and put it into a better framework and platform to deliver that information.”
Even with the growth of market data from electronic trading, Sedgwick doubted that this would change the relationship clients have with their dealers.
The webinar’s audience reflected his views when moderator Kevin McPartland, managing director, market structure and technology at Greenwich Associates, asked the same question. Of those polled, 79% said it would not while 21% responded it would.
From a dealer perspective, trading fixed income electronically is only going to continue to grow, added Chris Pepe, director of rates e-commerce at Deutsche Bank and final webinar panelist.
“It’s a point of efficiency,” he noted. “It seems to make a hell of a lot more sense to quote 3 million five-year notes electronically than to pick up a phone and get a bunch of quotes so on and so forth.”
Sedgwick also noted that T. Rowe Price is starting down a similar path in adopting greater electronic trading in its fixed income business.
“We are not in the sea-change environment yet,” he said. “It’s an area that we are watching closely with opportunities like more electronic trading and the use of algos. To the extent that more electronic data is providing more data, it is an opportunity to enrich our engagement with the sell side so that we can provide more granular feedback on how we are interacting with the liquidity provision process.”
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.
Algorithms have become more prevalent in the spot FX market.
Increased electronification has created useable and accessible real-time and historic trade data.
Buy-side firms can discover liquidity more efficiently and execute on Turquoise.