It is helpful for fixed income market participants to have their current range of choices in trading protocols and execution venues, but that optionality comes with a downside: liquidity fragmentation.
Maile Robichaud, head of fixed income trading Americas at State Street Investment Management, said one of the biggest challenges for a trading desk is to effectively re-assemble liquidity that is often dispersed throughout the marketplace.
“A trader needs to be able to determine where liquidity is, determine how you’re going to execute, and then scale that across regions,” Robichaud said Tuesday afternoon at the Fixed Income Leaders Summit in Boston.
Trading highly liquid bonds isn’t especially difficult, but anything below the most liquid names can be challenging, according to Mike O’Brien, global head of trading, emerging markets at Artisan Partners. There’s a wider variety of trading platforms and trading protocols for less liquid bonds, which means counterparties can have trouble finding each other.
One potential solution is to reduce the cost for asset managers to access fixed income trading platforms, O’Brien said.
Technology can help the buy side navigate fragmentation, for example with a leading-edge execution management system (EMS) that provides centralised interoperability and real-time data that provides a panoramic view of liquidity across trading platforms.
Innovation helped create the fragmentation that now exists by enabling new platforms to capture market share, but innovation can also help with fragmentation in the form of vendor solutions.
The buy side’s tonic for fragmentation is not all technological – it’s also about enhancing partnerships with sell-side banks and solutions providers, which can include more and better communication, transparency, and product customisation.
Lastly, the fragmentation panel discussed AI, with the takeaway that the technology will impact trading desks’ ability to find liquidity at size, but it remains to be seen how that will unfold.
The structural problem of fragmentation was also touched on in Tuesday afternoon’s systematic fixed income panel at FILS.
That panel first defined systematic in the fixed income context as simply turning an investment idea into a repeatable process at scale. Or, systematic can be likened to an algorithm in that it takes in data, applies rules, and generates a decision.
Regarding fragmentation, bonds.com CEO David Parker said certainty of execution at pre-trade is critical for systematic trading, so fragmentation can present problem. On the flip side, fragmentation can be navigated with the right tools, and it can provide value for systematic traders who can see where liquidity is cheaper.
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