These demands sometimes conflict with sell-side interests where balance sheet constraints can take precedence over maintaining consistent, fully-functioning markets. It is therefore vital that we partner with our key sell-side counterparties to ensure their limited balance sheet is available.
There has been a behaviour change in the market, one that evolves working more closely and transparently to achieve an outcome that is ultimately in our client’s best interest.
The best platforms have fast, efficient search engines that contain high quality, timely data. These venues are especially suitable for illiquid bonds, and enable traders to reduce the time previously spent scouring the marketplace and also minimise the risk of triggering adverse price movements.
These are advantageous to all participants, allowing the sell-side to reduce their inventory and free up their balance sheet while allowing us to source the paper we need.
More can be done to make electronic trading more efficient and accurate. A consolidated tape, recording transactions and their timings from all the myriad venues would be ideal. However, at the moment we don’t have solution to the creation of a European consolidated type, so this is definitely a space ready for innovation.
Nevertheless, as much as 60% of trading in liquid, developed market rates and cash bonds is already conducted at electronic venues, on platforms such as MarketAxess (US dollars), Tradeweb (Euros) and Bloomberg. Dealers need to justify their choice of venues, which typically charge licensing fees or on a trade-by-trade basis.
There will be increased onus on the buy-side to justify their choice of trading venue where there is direct or indirect fee charged on a trade-by-trade basis, as this will be part of the best execution decision.
Electronification is an important and evolving trend, but in some spaces, such as off- the-run credit default swaps and less liquid bonds, such as high yield and emerging markets, they continue to trade in the traditional fashion – by voice.
The new trading desk tasks
The buy-side trader’s role has changed significantly during recent years, and it is continuing to evolve. The trader needs to have the ability to follow and interpret a plethora of regulations, as well as assimilate and exploit the rapid improvement in data volume with sophisticated analysis.
Quant expertise is being recruited to work as or with dealers, and their importance will grow. Moreover, the fruits of the analyses must be shared with portfolio managers in a meaningful way, which add a further layer of responsibility and expertise to the duties and skills of the trader.
In the new post-MiFID II world the problem will not be the lack of data, it will be how to mine and manage the amount of data to get markets intelligence that adds real value to the investment process.
Although fixed income trading is becoming more scientific – or at least increasingly dependent on technology – there is still a strong need for individual expertise and intuition based on experience and strong relationships. The art of trading is not dead. The rise of the quants and the application of more automation, especially for data collation, analysis and interpretation supplements rather than replaces human agency.
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