Algomi: The two-pronged attack plan

Dan Barnes

Algomi has an idea almost universally agree to be good, yet it has struggled to get it adopted. It aggregates inventory data pre-trade, in order to overcome rising cost of liquidity in the corporate bond market.

“Our mission statement has always been to help market participants find connections towards liquidity. We started by helping banks to ‘know what they know’ then we reached into the buy-side with our Honeycomb platform,” says Stu Taylor, Algomi’s CEO.

Buy-side firms report that the sell side has been slow to engage, with some brokers only convincing desks on one side of the Atlantic to use the tool. Others have questioned how they might be charged for accessing what they see as their own data.
Nevertheless, Algomi is still seeing enthusiasm amongst big buy-side firms – Northern Trust Asset Management is a new addition – and it has a plan of attack.

It has acquired AllianceBernstein’s pre-trade Automated Liquidity Filtering & Analytics (ALFA), a system championed by Jim Switzer, global head of credit trading at AB and Tim Morbelli, vice president for Credit and Derivative Trading at AB.

ALFA provides cross-market information on liquidity and trade intent in order to give the buy side a real-time view of the entire bond market including government bonds, investment grade, high yield, emerging market, municipal debt, and structured credit.

In acquiring the intellectual property rights Algomi has also taken on T. Rowe Price, BlueBay Asset Management, Brown Brothers Harriman and AllianceBernstein, amongst the early adopters of the Algomi ALFA system.

John Orrock, senior trader and trade operations lead at BlueBay Asset Management says, “The way in which fixed income markets operate is changing as the buy-side continues to take a more active role in providing liquidity. What is interesting about Algomi ALFA is its ability to aggregate price information across the breadth of the market, including new sources of liquidity drawn from message platforms, e-venues and bank inventories. Such features can increase the likelihood of a successful trade and we think this has the potential to be a ‘game changer’ for price discovery in bond markets.”

To increase its appeal to the sell side, Algomi has partnered with Euronext in order to facilitate interdealer data sharing. The concept is to bring the collective knowledge of banks together to help find another side of the trade.

“Euronext is able to essentially match banks together in ways that haven’t been done before by their IDB community, because they can tap into market events so it just makes it smarter,” he says.

While the interdealer markets, often based on bilateral relationships, are leveraged every day, Taylor believes they could be more efficient.

“In many cases it still doesn’t result in a transaction and tools like Honeycomb can try to make that situation better by allowing a bank that is trying to get something done and struggling to tap into the knowledge of the other banks and then help that buy-side client a lot more, on an interbank basis,” he says.

The plan is to roll this model out beyond Euronext’s European base in order to allow local exchanges in other regions to leverage their sell-side relationships and become trusted information exchanges for fixed income.

“If you look at the statistics, we see this via Honeycomb, on the hard-to-trade bonds banks that take risk on take it on at under 10% of volume or at highest 25% of volume they are really focussing risk on very small number of ISINs,” he says. “An individual bank looking to buy or sell bonds can maybe increase that by 5x or 8x just by realising their own internal knowledge. But if you put all of the banks together in a joint network you can offer answer enquiries 90% of the time.”

Algomi will be pushing into the US this year, assisted by its acquisition of ALFA, which has been well-received amongst major asset managers.

Alex Sedgwick, head of Fixed Income Market Structure & Electronic Trading at T. Rowe Price, says, “A perfect storm of challenges is driving the industry towards new technology in fixed income markets. A low rate environment, data fragmentation and increased regulatory focus are all leading to greater demand for more comprehensive and aggregated pre-trade information across markets. Algomi ALFA will give our fixed income traders and portfolio managers a consolidated view of corporate bond market activity, enabling them to spot relative value opportunities, and further support our efforts to deliver best execution to clients. We look forward to integrating Algomi ALFA in the near future.”