Beyond Equities: Evolution Of Technology And Concepts Into Fixed Income And Currencies

Equities are highly electronic, so our conversations with vendors are more around fine tuning than re-engineering. In fixed income, we are very proactive in contemplating solutions that would not only benefit our clients, but the broader market.
A few years ago had a conversation with a start-up company as well as an established electronic trading provider and suggested they get in a room together. The vendor was working on a pricing methodology based on Bayes theorem, or ‘nearest cousin’ pricing. The idea was to take trading data from many sources and build curves on similar bonds and come up with a theoretical price of where they would be trading in the market.
State Street approached a well-established vendor in the electronic trading space which understands the surrounding challenges, and we asked them to apply their intellectual capital to create a solution to cross bonds. The plan never came to fruition due to various challenges and changes, but it’s a good example of how we’ve taken this out to the market to explore new ideas.
What’s different about our approach today is that we pursue electronification proactively and if we can play a role in engaging with our peers, vendors and other market participants to discuss ways to apply concepts from equities to fixed income, we will.
We are not the only firm pursuing this approach and over the last few years, buy-side and sell-side firms met and talked about a lot of these issues and worked on how to think through them more efficiently. And there were ideas of crossing and more efficient transmission of inventories. The result of this is that we are having more active and productive conversations. While the buy-side has been driving many conversations, the broker dealers are also being very proactive and the vendors want a partner. This is happening across all the asset classes, but in particular within fixed income.
How do these conversations vary across different regions?
SSgA has clients all over the world covered by multiple regulatory regimes, and you have to think about what kind of input they are giving at a regional level and how that informs your global strategy. What we try to do is identify how for liquid instruments, for equities, the rules in the US may be different to the UK or Europe or Hong Kong. In equities, 90% of our activity in the US happens electronically. And again, this is a function of asset composition.
I’d estimate that this percentage is 70% electronically in equities across the three regions. In some markets, electronic connectivity has matured or is in a different phase from a local market perspective and what a vendor can offer in terms of upgrades and tools to us.
What does the future hold?
At the end of the day, our primary goal is to get the best possible result for our clients. We have to constantly look at all markets going forward across asset classes and to push for the changes we think will create the most efficient markets possible.
We are constantly looking for examples of what works in fixed income, currency and equities and considering if there is an application in another asset class. We examine where we could take those conversations with vendors, market participants, regulators and exchanges into a new direction to make it more efficient.
The future holds many more of those conversations. We are also continuing to push that efficient frontier on electronification for central limit order books or virtual limit order books. It could also be that we work with other vendors to expand market access. Many of the trading protocols in fixed income are expanding to connect more efficiently.
What you’re going to see is market efficiency continuing to grow. The conversations so far are just the tip of what is possible and I believe the buy-side will continue to take a more active role in driving these discussions.
The pace of change will increase because of a much more engaged buy-side, sell-side and vendor community. The brokers in our market have also been very responsive and proactive in their approach. While there are many different views on how change will take place, the end result will require collaboration and technology.