In Bond Trading, Voice Still Carries

Terry Flanagan

The fixed-income market is undergoing rapid transformation amid diminished dealer inventories and a proliferation of electronic trading-platform linkages among and between dealers and buy-side institutions.

Voice, however, still plays a prominent role, especially in less-liquid securities.

“In the illiquid part of the credit markets, the market structure is not necessarily broken, it’s just not that efficient,” said Stephen Gallagher, head of U.S. sales at Algomi, a provider of fixed-income trading technology. “Most of the dealing desks around the industry make most of their revenue from the voice part of the business, not the electronic part of the business.”

The increasing regulation of recent years has led to significant balance sheet shrinkage, with banks now holding less than 1% of the total market’s inventory, according to Gallagher.

“Lower risk capacity is a permanent feature of the fixed income market for the foreseeable future. While liquidity remains healthy for smaller trades, and while e-trading platforms serve this market well, it only accounts for 30% of volumes,” he said.

In the absence of strong balance sheets, banks need to maximize distribution channels and disseminate internal and market-sensitive information quickly and accurately.

“We think the electronic space works very well,” Gallagher said. “There’s nothing broken about the electronic world. The MarketAxesses of the world, the Bloombergs, the Tradewebs–they are executing a lot of tickets for the buy side, and they do it very efficiently. The problem is, when you start getting involved in the more illiquid trades, a lot of those trades are not appropriate for electronics. Those trades are more appropriate to have someone in the middle that can help both sides of that trade.”

Algomi’s core product, Synchronicity, integrates and organizes bond data (new issue allocations and orders, completed and missed trades, IOIs) which the dealer can use internally. “If you’re sitting on a typical trading desk, there are hundreds of different situations that you could be working on at any given time. This streamlines that process,” Gallagher said. “It helps the sales force figure out the best thing, at the time, for them to be working on.”

Later this year, Algomi will launch a product that enables dealers to communicate, or “smart market,” this information to the buy side. “Once the dealer has digitized all this information, he can share it with clients,” Gallagher said. “When we digitize all that information for the dealer, it allows that dealer to find the other side of the trade. That is what the big buy side clients are desperate for right now.” This product is currently in beta with 20 buy-side institutions, he said.

Featured image via iStock

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