The fixed income market is undergoing a period of rapid change never seen before, perhaps in any asset class. Regulation, new technology and economic conditions are converging on fixed income and market participants face a very different fixed income trading environment than they have seen in the past.
David Vincent, CEO of smartTrade, says: “Under MiFID II, there will be a big difference with how banks operated in the past. Greater transparency rules are driving trades to go electronic and competition means banks need a new way to differentiate. In the future, there will be a much bigger focus on the data and analytics side to create value.”
On the economic front, the financial crisis of 2008/09 saw interest rates sink to record lows around the world, gave rise to a European debt crisis and slow economic recovery, all of which spelled bad news for fixed income investors.
However, David Vincent, CEO at smartTrade, says these difficult conditions are starting to give way.
“We saw an increasing interest for fixed income technology solutions presumably due to the economic environment improvement and rates rise speculations in Europe,” he explains.
But as the economic environment improves, regulation is set to scupper plans for those who expected a return to normality. Dodd-Frank and the European Market Infrastructure Regulation (EMIR) have each shaken up the industry, but MiFID II, which comes into force in just a few months’ time in January 2018, will be a sea change in the way fixed income is traded.
Vincent says: “MiFID II is the big one for fixed income, it impacts this asset class more than any of the others. While fixed income has been partially electronic for some time, we are now seeing more moves to electronify the client workflow and growing use of algos by banks to improve execution.”
Dodd-Frank in the US has already forced some fixed income trading onto electronic trading venues and MiFID II will do the same in Europe, but creates an even stronger incentive to trade fixed income electronically, according to Vincent.
Banks have been seeing improving returns in the fixed income, currency and commodities divisions (FICC) in recent years, in part due to the improving macro-economic environment, but also due to having significantly restructured their technology operations.
Cost is among the key concerns for the banks and switching vendor can be a major exercise, but with many using a single vendor using legacy technology, it is simply no longer viable to avoid upgrading as clients are increasingly demanding sophisticated and flexible technology that can deal with modern execution and analytics needs.
The wider array of specialist venues and commoditisation of fixed income means that buy-side firms have higher expectations of the kind of service they expect from their fixed income partners. Trading solutions, automated negotiation and advanced analytics are the kind of functionality traders have come to expect.
“Building this can be very expensive, and the technology quickly becomes outdated, it requires constant investment,” adds Vincent.
So what are the major requirements to compete in the new fixed income technology landscape? Vincent says there are many areas that need to be considered together to get the best results.
Connectivity is essential as having a robust and rapid connectivity solution is necessary to tap into sources of liquidity in a fragmented market. Hosting can play a big part in this, as deploying in the cloud can provide a rapid time to market, enabling firms to quickly get connected.
Sophisticated analytics is one of the biggest requirements for fixed income traders today and not only because it’s something regulators want to see, but it is also likely to be crucial to doing more cost-effective business and ultimately improving returns.
Technology providers also need to be highly flexible, with the fast pace of change in both regulation and macroeconomic situations, it’s no longer possible to sit still, firms must be constantly updating and innovating their products.
Making this work in a modern trading business also needs a wide footprint in both geographies and asset classes. Trading is increasingly taking place cross-border and many trading desks have combined to provide multi-asset trading and they need workflows that support this.
Fixed income is undergoing dramatic change, but with improving market conditions ahead, banks and investors could be about to reap benefits by making use of new technology that equips traders with more knowledge and better connections than ever before.