Automated Fixed Income Execution Surges
Clients and volumes at Tradeweb’s automated intelligent execution offering, which automates request for quotes, have increased five-fold over the past year ahead of stronger best execution requirements coming into force in the European Union next year.
Charlie Campbell-Johnston, director, head of integration and workflow solutions at Tradeweb, told Markets Media: “We designed a tool leveraging our FIX network to automate the RFQ process and allow trading direct from an order management system.”
Approximately 90% of orders on Tradeweb’s electronic platform are executed from an order management system using FIX, the standardised messaging format for financial markets. Therefore, it becomes very easy to select automated intelligent execution by simply adding a FIX tag to an order. Clients can also set rules for the automatic execution. For example, the rules could include a maximum order size in an asset class, the number of counterparties that receive an RFQ, the number of quotes that have to be returned and the length of time for a negotiation.
Campbell-Johnston said: “The ‘codifying’ of execution criteria through automation can be a significant help for investment firms needing to demonstrate the process of best execution.”
MiFID II, the regulations covering European Union financial markets that come into force next January, extend the best execution requirements from equities into a range of asset classes including fixed income.
“In the last year the number of clients and volumes opting for automated intelligent execution has increased fivefold, and the growth in swaps has been extraordinary,” added Campbell-Johnston.
By number of tickets, approximately 20% of European government bond and 35% of European credit transactions are automated. He said: “Total volume conducted this way is in the high single digits for notional amounts, although it significantly increases at month end.”
In a webinar, Automating the RFQ Process, in July Campbell-Johnston said the buyside is looking to automate execution as they are now trading twice as many products as in 2005 and five times as many tickets. In addition, a survey from consultancy GreySpark Partners had found that 38% of asset managers spend more than 30 minutes every day correcting errors in trade data.
“The speed and efficiency of this automation opens up a whole range of execution options not available through more manual trading options,” added Campbell-Johnston.
In the webinar Campbell-Johnston said the automated intelligent execution offering can cut trade times for high volume trading in liquid markets. For example, government bond trades were 40% faster, and can also cut transaction costs.
He continued that automating execution works best in low volatility markets where the counterparty response is high and fast. Campbell-Johnston compared the offering to autopilot on a plane, which is used when conditions are fair, while a pilot can take over during turbulence or take-off and landing. Similarly, automating the execution of smaller transactions allows traders to focus on larger blocks where it is harder to find liquidity.
Campbell-Johnston added in the webinar: ”A number of larger buyside firms have set up dedicated low-touch desks to reduce operational risk and increase efficiency.”
Consultancy Greenwich Associates said in a recent report, Technology Transforming a Vast Corporate Bond Market, that the buyside is deploying technology that leverages data and analytics and enables investors to access new electronic and traditional sources of liquidity.
Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in the report: “The bond market’s post-crisis liquidity decline has been spread across an increasingly diverse list of bond issues represents a challenge that is driving a search for new skills and new technology on buyside trading desks.”
Nearly 85% of investment grade investors use electronic trading, compared to 69% in 2013, and electronic trading accounts for 20% of overall trading volume on a notional basis.
“95% of investors that trade electronically have MarketAxess on their desks, and they utilize it to execute 85% of their electronic trading on a volume-weighted basis,” added Greenwich. “Despite the corporate bond startup boom of the past five years, only four other participants remain in the institutional landscape, each with their own value proposition. Although the percentage of IG volume traded electronically over the past year held steady overall, Tradeweb, Bloomberg, Liquidnet, and Trumid all continue to show growth in their buyside desk penetration.”
The study also noted the rise in autoquoting, where liquidity providers are increasingly responding to RFQs below a certain size and/or risk threshold using algorithms to calculate a price appropriate for that particular request, without any input from a trader. The algorithms price quotes based on the individual client, current market liquidity, the dealer’s current risk position as well as other factors.
“As investors themselves start to utilize algorithms to automatically select the right counterparty for a given trade based on RFQ responses, the bond market will have its first foray into computers trading with computers,” added McPartland. “With dealers and investors alike now focused on electronic trading and empowered with data and analytics, execution quality and speed will allow new entrants to gain share where never before possible.”
Major innovation is two to four years away.
Only 157 corporate bonds out of 39,000 were deemed liquid.
The figures show how many instruments are classified as liquid.
Challenges include illiquidity and fragmentation across borders.
Buyside can seamlessly contact counterparts in the Neptune workflow.