Buy-side Perspectives Issue 3 - Page 10

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. 10 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.