How bond trading platforms are redefining cost efficiency in European fixed income
The cost of trading bonds has long been an opaque and contested arena. Fee schedules are published, but can be indecipherable. Savings are promised, but hard to find. Now, with dealers under margin pressure and buy-side firms fighting for best execution, a new debate is emerging about clarity on fees.
Dan Barnes spoke with Angelo Proni, CEO and Nick Sollom, head of business development & strategy, MTS Markets about why the next frontier in European market transparency may be trading costs.
Trading costs are in the limelight currently, what are the big questions around costs today?
Nick Sollom: For us the big question arose when we were developing portfolio trading, and we looked at the fee schedules that are posted by other platforms. With some, you cannot tell whether the costs are aimed at the dealer or the client. What appears to affect the dealer is actually a mark-up on the client. It’s just so opaque. The question we ask, why is there not more clarity on cost of trading?
To that point, is cost an issue for buy-side traders and are cost savings passed on to clients by dealers?
Nick Sollom: Yes, we’ve seen this play out in our own experience. When we launched credit, we were obviously hopeful that our lower costs would lead to price differentiation, and that dealers would honour it, offering better prices through streams to clients. That is how it’s working out. There’s a number already doing that, and not a single dealer has said they won’t. They’re either doing it or building the capability. The dealers were actually saying to us at the last credit committee meeting: ‘You need to shout this out louder, that there is price differentiation, and that we are passing on those trading savings to the buy side.’ That’s music to our ears. I think they have an obligation to honour that.
How do you reconcile the argument for lower costs with the need to keep rolling out new functionality?
Angelo Proni: Those two things are not unrelated. It’s true that in parts trading services are becoming more commoditised, and therefore cost certainly becomes a key component of users’ choices. But you also have to consider that’s only valid once your set of services, functionality and asset classes clears a threshold. Real money investors have to invest time integrating, connecting and onboarding. That’s always where the most friction is. So on the one hand, yes, we have a strong cost proposition. But that has to be offered alongside a range of products that justifies the choice in the first place. We’re doing that thanks to the functionality we’ve rolled out in the past 12 to 18 months. We’ve never rolled out that much key functionality, especially in dealer-to-client, that quickly. That’s a direct result of managing our technology in-house.
Is opacity of fee schedules a transparency problem, or something more fundamental?
Angelo Proni: MiFID requires platforms to publish their fee schedules. But there’s nothing in the regulation that requires any clarity in those fee schedules. Transparency is a pretty vague term compared to clarity. Everyone can see everyone else’s fee schedules – the question is how intelligible they are. I think that’s where this whole discussion should sit.
Nick Sollom: Should the buyside be receiving, even post-trade, a detailed breakdown – effectively an invoice – showing how their trading costs were influenced? That would include how a dealer’s price was constructed, particularly where protocol choice on the platform has had an impact, as well as what costs were passed through by the platform itself. The real issue is that many buy-side participants aren’t even aware that these costs are being applied in the first place.
The buy side traditionally didn’t pay for access to these platforms, so how did it get to this point?
Angelo Proni: It’s been like boiling the proverbial frog. Traditionally the buy side didn’t pay, but there was a slow process of incrementally increasing costs for the buy side to the point where now the buy side pays – and pays quite a lot. But I’m not sure you can pull that trick off twice, or keep it in place indefinitely.
How are cost pressures showing up on the dealer side?
Nick Sollom: We know for a fact that major hedge funds and sovereign wealth funds have carried out really deep-dives into what it costs them to trade. That’s no quick job, they had to bring in some serious people to dig into it. But it shouldn’t be that way. The fact that some of the largest institutions in the market are having to do this means, I’m sure, more will follow.
Trading costs do vary, particularly in volatile markets, can you determine that costs are falling but liquidity is not affected?
Nick Sollom: Dealers are beginning to offer price differentiation, honouring the lower costs in their client-facing streams. The buy side is happy to pay if it’s additive in terms of liquidity provision and moves things forward. But if you’ve got a platform not charging for a process ticket but charging for an RFQ-to-one – it’s the same thing. You’re just trying to catch people out, and that’s where the buy side get very salty about it.
What is MTS developing and offering in terms of trading protocols, without increasing buy-side costs?
Nick Sollom: We obviously sit at one extreme, because we don’t charge the buy side, and we keep rolling out protocols. That’s not to say there wouldn’t come a point where an appropriate fee would apply. But at the moment, we’ve caught up on portfolio trading, and we’re now introducing new protocols that capitalise on our positioning.
Angelo Proni: There are two key new protocols we’re introducing. One capitalises directly on our positioning in order books – targeted firm streams. We can achieve round-trip times that are easily best-in-class, because we’re the leading platform doing order-book trading in government bonds. We’ve taken that technological capacity and applied it to the dealer-to-client market. The other is a market-on-close protocol for Gilts and European Government Bonds (EGBs) — and the raw material we use to get the fixing and the close price on which that actually trades comes from our order books as well. That’s the same data, for example, that the European Central Bank (ECB) uses for its estimated yield curves that it publishes on a daily basis. The uniqueness of what we offer really does come from a number of components combining.
Can you explain how sharing infrastructure across rates and credit changes the cost equation?
Nick Sollom: The cost efficiency is leveraging expertise within the broader group — because we’re doing credit and rates on the same platform, unlike some of our competitors. That brings quite a lot of cost efficiency to it.
Angelo Proni: We have an interdealer market and a client market, and that really does set us apart from the other players in the field. It goes back to that moment — after more than a quarter of a century of doing this — when we finally managed to be in charge of our own technological destiny.
Contact: mts.sales@euronext.com
Website: mtsmarkets.com
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