Buy-side Perspectives Issue 3 - Page 12

“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 12 The Buy-side Perspectives | Issue 3 | April 2016