EQUITIES AND FIXED INCOME
Mid cap liquidity access is particularly
key in Europe which represent a major
part of our flow but is sensitive to
market impact. We need the smart
order router to route the flow to the
right venues to avoid signalling and
toxicity issues.
The ‘alpha trader’ concept
is a continuously growing
theme within the buy side
as we are facing increasing
complexity to find liquidity
with the fragmentation and
we need to deliver smarter
answers about the market
developments in the short
term.
We leverage TCA and venue analysis
to identify which of our sell-side
counterparties are staying abreast of
the technology race delivering the best
performance. We hope that European
brokers can also keep up in this costly
technology race as we know the US
banks have the capability of investing
more. We do need strong European
counterparties as challengers within
the brokers list to prevent an oligopoly
which would be undesirable for the
entire market. These European banks
need to make investments in trading
technology to sustain the momentum.
With plenty of news around the new
equities venue and crossing network
services, which innovations do you
think stand out as beneficial to the
buy-side trading community?
Post MiFID II, I have found that
“tradeable IoIs” are very useful new
alternative tools to access the market.
It is interesting to have the option of
accessing the balance sheet of the
bank. Workflow works very well. Similar
to our buy-side peers our objective is
to reduce our footprint of execution on
the market and our key challenge is to
understand where we can find liquidity
12
before having to access the LIT market.
Periodic auctions have delivered
incremental short-term liquidity and
the reversion results look promising. We
have reduced our volume participation
in the LIT market. In the past we traded
in the range of 10 -20% of the volume
but now, we are in line and closer with
the US market and have reduced our
participation to take into consideration
the market structure evolution. We are
closer to 5 - 10% of volume in Europe.
Our goal is to find liquidity through
other MTFs with dark liquidity, blotter
scraping, periodic auctions and specific
flows through SIs before trading on the
LIT market.
As we still experience evolving trends
among the buy-side how they use
bond trading platforms, how do you
feel the race is progressing between
dominant legacy and challenger
brands? Has competitive pressure
resulted in overall innovation and
how do you foresee the competitive
landscape to look like in 3 years’ time?
My simple view is that increased
competition and alternatives are useful.
Platforms like “BondCliq”, a consolidated
quote platform for the corporate bond
market are useful as they create a
competitive environment. The result
could be a more efficient trading
market centralised and organised.
This is what we are looking for to
improve the pre-trade price discovery
and deployed automation. Another
platform is “Opendoor Trading”, which
intends to offer all-to-all anonymous
trading with zero information leakage.
I think that anonymous trading is one
solution to improve the fixed income
market structure and to centralise
the market. In Europe we saw a lot
of new entrants a few years ago but
now there is mainly MarketAxess,
Bloomberg, Tradeweb and Liquidnet
which is growing but is different as
it is focused on buy-side to buy-side
trading. Electronification in fixed
income is growing and there will likely
be more new interesting participants.
Some people define it as “equitification”
www.buysideintel.com
but I do not agree with that definition
as it is still completely different. What
was developed for equities is not
something you can gold copy into the
bond market. The market structures
are not comparable with only about
40,000 equities ISINs compared to over
a million bond ISINs.
Data is crucial and we are still
challenged with trying to identify
sources for fixed income data and the
quality of it. Our traders need better
data to produce better pre-trade
intelligence for our PMs and to decide
on the right trading strategy to optimise
the trading process. The buy side have a
major challenge finding the right tools
to operate in a complex fragmentated
market with a lack of liquidity.
The value of the alpha trader in the
fixed income investment process is
relatively similar or more important
compared to Small/Mid cap within
equity trading. Another issue is how
we can review the performance of the
execution in bonds. While it is common
to trade using the RFQ protocol, it is not
always the best way to find liquidity
due to the hidden cost of information
leakage on the market. Therefore,
we need to create a smart logic to
divide our workflow between liquid,
non-liquid, high touch, low touch,
time sensitive and non-time-sensitive.
Better data will help us with both
our automation needs and improved
pre-trade market intelligence for more
complex markets.
Another interested trend is that the
sell side are appointing one person in
charge of eTrading across asset classes.
In the future I foresee that we may
receive a price stream, like within FX
today, from our various counterparties.
Such price streams could be aggregated
to create an order book and smart order
routing could deliver automation and
optimise the execution process. Only
time will tell if the existing platforms
will aggregate such price streams
efficiently. Trades below €1 – 2 million
investment grade could be automated
by a sort of order book created by a
directly executable price stream.
Summer 2019