Fixing
fixed income
Brett Chappell, head of fixed income trading,
Nordea Asset Management
Voice trading is going to be a thing of
the past. There will be consolidation
on the sell-side. The buy-side needs to
learn how to aggregate data and above
all how to aggregate liquidity. Attitudes
and behaviour will have to change, and
the buy-side will have to open up more.
These are the conclusions reached by
Brett Chappell, head of fixed income
trading at Nordea Asset Management.
“There is liquidity despite
what everyone says, but
there can be a steep cost,”
Chappell told the Buy-side
Perspectives. “Liquidity is
fragmented if you don’t know
where and how to look.
We pull data from various
sources to see where to go
and whom to approach.
A good EMS is essential to
assimilate all this information
into one place so our
screens don’t look like a
work by Jackson Pollock.”
The decline of liquidity in fixed income
is well-documented. In essence, the
sell-side is both less able and less
willing to intermediate risk, due to a
combination of regulatory pressures
and the higher costs that have been
introduced by reforms intended to
prevent a rerun of the financial crisis.
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Part of the solution may be the rise
of new electronic trading platforms
in fixed income. For Nordea, these
platforms include venues such
as Project Neptune, B2Scan,
Honeycomb and Bloomberg, as well
as Liquidnet and TradingScreen, both
of which have fixed income offerings.
According to Chappell, these venues
are increasingly becoming a first
port of call rather than the sell-side.
However, he still believes that buyside to buy-side pool initiatives are
not a replacement for the banks but
rather a supplement to them. “We still
need their research and primary, their
services etc. But when the liquidity is
not there, we need to seek alternative
liquidity channels,” he said.
For the newer platforms, those willing
to go the extra mile on corporate
governance may gain the upper
hand. Like other buy-side institutions,
Nordea places a high value on
systems that can’t be gamed by
unscrupulous players in the market.
There is also a sense that some of
the newer platforms may be tailored
more to the second and third tier,
while in other parts of the market
new brokers may emerge focused on
niche segments. But for Nordea, one
of the important factors is how any
new platform can interact with the
firm’s OMS.
The Buy-side Perspectives | Issue 3 | April 2016
While in some areas such as equities,
market players are talking about
the empowerment of the buy-side,
in fixed income there is a limit to
how far that can go. According to
Chappell, the buy-side can certainly
engage with other players in the
market more often – but the buy-side
is not in a position to take over all the
duties of the sell-side.
“If there’s a very illiquid
bond, it doesn’t hurt to
reach out to other asset
managers to ask who is
good at this,” he said. “This
is a relationship question,
not an agency broking
model. We do not have
the mandate to replicate
a bank’s business model,
nor do we wish to do so.
We are here to help our
investors generate alpha.”
One of the major factors behind
change in the fixed income market,
as with other asset classes, is
regulation. There are multiple
regulatory initiatives that impact
Nordea and other buy-side firms
in the fixed income space; these
include the European Commission’s
MiFID II directive, as well as its
CSDR legislation, which aims to
harmonise the rules and supervision
for Europe’s central securities
depositories. Then there are the
different regulators at a national
level – Nordea interacts with four in
the Nordic region alone. The different
standards arising from these
differences are a significant source
of cost for the business – and even
moves to standardisation are not
always positive.