“By 2020, we will see the
majority of trades, even voice
trades, being carried out
electronically,” said Chappell.
“A voice trade is going to
be a thing of the past. We
may see social networking
applications superimposed
over more traditional trading
tools. Chat systems have
replaced the message
function in just a few short
years. The status quo ante
will no longer be viable.”
One subset of tools that will remain key
to best execution in fixed income is
TCA. For the buy-side, there are two
basic options: either to build a system
in-house, such as the system built by
AXA Investment Managers, or to buy
from an outside vendor. One of the
potential advantages of a vendor is that
they can be neutral towards the buy-side
firm’s customers. At time of going to
press, Nordea is currently reviewing its
options for TCA, including meetings with
TCA providers.
“TCA is a subset of best execution,”
said Chappell. “It can quantify alpha
generation by the trading desks
as well as allowing a manager to
ascertain trading staff’s patterns and
behaviour. There is no standard setup
for fixed income, and there will be an
even more pressing need for best ex
documentation in the run up to MiFID II
in January, 2018. Fixed income desks
need to ascertain what they need first,
align these criteria with the trading and
investment styles, and then look at
TCA as a natural evolution. Only at this
point does it make sense to approach
a service provider by laying out your
specific needs, rather than panicking
and buying an off the shelf product. To
further complicate matters, there is no
benchmark for the providers’ annual
subscription fees. We have been going
through the beauty parade for fixed
income TCA providers and the prices
proposed are all over the shop.”
Despite the ongoing electrification of
the fixed income markets, there are
limits. While execution algorithms
have made strides forward in other
asset classes such as equities and
FX, not everyone is yet convinced
of their value in fixed income. “Algo
trading is possible, but given our
active investment style, liquidity, and
counterparty constraints, it is not
currently feasible for us. Much of
what we do is still very high touch,”
said Chappell
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The Buy-side Perspectives | Issue 3 | April 2016