Fintech Targets Fixed Income
Fintech firms will continue to target the bond market as trading becomes more electronic and regulations change how firms approach data and reporting according to consultancy Aite Group.
— Aite Group (@AiteGroup) January 23, 2018
Audrey Blater, senior research analyst at Aite Group, said in a report that the number of electronic bond trading venues and trade flow technology providers will increase this year. The study, Developments in Electronic Bond Trading: What to Expect in 2018, predicted that exchanges and banks will partner with existing fintech firms and invest in proprietary technology, while new entrants will develop workflow and data aggregation products.
“The number and breadth of pure fintech firms entering the corporate bond space is mindboggling but likely has not reached critical mass,” added Blater.
There are high barriers of entry for execution but there is innovation around improving a trader’s workflow such as pre-trade efficiency.
“Software designed to aggregate price information from many sources aids in the price-discovery process,” said Aite. “Rather than viewing quotes via an execution platform or dealer runs, this type of technology creates a synthetic network of information.”
New technology can organize data such as trading platform depth, indications, broker pages and runs, messages, websites, and even email. In addition MiFID II, the European Union regulations which went live this month, introduce pre- and post-trade transparency and best execution requirements to the bond market.
Aite continued that aggregation tools offered by trading venues and fintech firms, which are designed to capture axes, indications, and other fixed income data, are well-suited to perform the mandatory pre-trade requirements. Data-driven automated solutions and additional technology are also needed to comply with post-trade transparency requirements. In addition, complying with the best execution manadate requires internal and external market time series, client order tracking, and client reference data points.
Shawn Samuel, chief technology officer at LiquidityBook, told Markets Media that MiFID II has made operating in all markets more complex. “We want to go deeper in more asset classes. We see a lot of opportunity in fixed income with the new MiFID II,” he added.
LiquidityBook is a software as a service-based provider of buyside and sellside trading systems including its POEMS (portfolio, order and execution management system) platform.
“Our platform is built on modern cloud technology like Amazon and Google and so has the same advantages of scale and leverage,” said Samuel.
He continued that LiquidityBook opened an office in London last year due to the firm’s success with hedge funds in Europe.
Samuel added: “The key features they’ve seemed to gravitate towards is our flexibility over legacy order management systems given our software as a service model and the ability to customise workflows.”
Sean Sullivan, chief revenue officer at LiquidityBook, told Markets Media: “The competitive landscape is largely full of systems that use old databases, 10-20 year old code and local deployments of myriad versions. It has taken time for acceptance of fully cloud-based systems, but now that buysides are comfortable with it, a huge number of legacy technology systems are now being reviewed given their inherent disadvantages.”
Sullivan added that LiquidityBook is far along the sales process with a handful of asset managers in London and another two are in the pipeline.
“We expect to see activity pick up in London now that MiFID preparations are complete,” said Sullivan. “We think there’s a good chance we will double our footprint in London over the next year.”
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.
Tradeweb reports a fivefold increase ahead of MiFID II.