Fixed income
It can sometimes seem as though all the talk in fixed income is about the
demise of liquidity, the excessive burden of regulation, the dangers of
regulatory intervention (Europe, we’re looking at you) and the possible
harm to the market this could cause. While these are very real issues and
concerns, there is much more to be said for fixed income than these points
alone.
In 2016, some asset managers are striding forward with the development
of advanced TCA in fixed income; one buy side is already experimenting
with the use of algorithms. But perhaps the question with the greatest
potential to reshape the market is how industry collaboration can achieve
improvements for the whole market, by bringing buy-side traders and
brokers together.
Coming up in the second half of the year, some of the key issues are: fixed
income trading challenges and opportunities in European, Asian and
North American markets by country; trading bonds in Europe, Asia and
the USA; trader remuneration and fixed income team management; and
transforming the trading desk for impending regulation (MiFID II/MiFIR, MAR
and PRIIP).
One of the biggest potential obstacles to improve the market structure
is that some buy siders have reported difficulty with buy-side to buy-side
platforms in fixed income, due to prices that are perceived as higher than
the mid point. The London buy side say they must reduce their sell side
dependency. The fragmentation of liquidity between multiple competing
venues also poses a challenge to the buy-side trading desk, particularly
as the market increasingly bifurcates between bonds that are liquid and
those that are not.
Inevitably, the regulatory agenda touches on other aspects of trading
fixed income as well. One issue is the impact of unbundling, which is
currently being introduced under MiFID II in Europe but the shadow of
which is also affecting Asia and North America. Some buy-siders are
worried that the separation of payments for research and execution
means the demise of much of the research, with a resultant increasing
concentration of attention on a smaller range of assets, leading to less
opportunity to achieve Alpha.
Trading fixed income has always been a niche skillset. The fixed income
landscape consists of thousands of different bonds, each with different
maturities and variations, each with its own liquidity profile and each
with different regulatory obligations attached. These may affect which
platforms they trade upon. One of the open questions these days is how
fixed income ought to be integrated into an increasingly multi-asset class
trading operation.
Despite talk of the increasing electronification of the fixed income market,
the other issue is data. Best execution may be difficult to achieve and
even harder to prove, in a market where obtaining quotes from more than
one broker may result in the market moving against the trader. Holistic
aggregated data is not necessarily available in any case; some buysiders question the extent to which TCA is even relevant in fixed income,
especially in some of the smaller and more niche markets such as Asia’s
frontier and emerging markets.
August 2016
www.buysideintel.com
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