Benjamin Becar, Fixed Income Product Manager at smartTrade Technologies, speaks to The DESK about how technology is key to overcoming buy-side fixed income challenges.
Has the fixed income landscape changed nearly one year after MiFID II went live?
It is difficult to assess the impact of MiFID II for several reasons. The first is that some of it is recent or not even live (think of the Systematic Internaliser regime), and the second is that a number of other factors are in play.
For example, there has been a shortage of liquidity, especially in the corporate bond world, despite a large increase in issuance over the last few years. Interest rates have been historically low, which has caused banks’ profits to shrink and obliged many of them to restructure their operations. The situation is slowly improving across the world, with notable differences across regions.
Banks and primary dealers who were traditionally the main market-makers have been taking less risk and are now playing a smaller part in fixed income liquidity provision. In contrast, proprietary trading firms, All2All venues and electronic platforms are now interesting sources of liquidity to tap into.
That said, the immediate effect of MiFID II was to drive players to get technologically equipped to achieve better transparency and reporting. Typically, financial firms come to smartTrade Technologies searching for solutions, such as data collection and storage, rules engines and analytics tools. Many financial firms have electronified workflows which were previously more manual and voice-driven. In doing so, they have taken the opportunity to streamline and automate trading workflows beyond MiFID II requirements to improve their execution, to lower their costs and to get ahead of the competition.
What are the key buy-side challenges in fixed income today?
There are plenty of challenges faced by the buy side, whether they are regulatory compliance, bringing positive returns in a low-interest-rate world, competition from indexed and algo-driven funds, or the digital transformation as a whole. With smartTrade’s expertise in technology and connectivity, we help them solve issues around lack of liquidity, market fragmentation and electronification.
And although each buy-side firm is different, whether due to their profile, their size, their type of clients, their geographic distribution and so on, we have found at smartTrade that they tend to adopt trading technology in a similar sequence.
The first step is usually the electronification of previously manual or voice-driven interactions with liquidity sources. This is closely followed by the electronification of the post-trade workflows or straight-through processing. This helps firms which used to rely on files or manual input.
Then there is the pre-trade electronification, where you ‘stage’ orders on D2C venues to avoid human errors, since all the characteristics of the trade (usually an RFQ) come directly from the previous system.
Because buy-side firms have to interact with a growing number of liquidity sources, they usually need to consider some kind of aggregation. This can be done in two stages: first, a global view of the current liquidity, and then, the electronic access to this liquidity. This involves more advanced tools in order to operate across different trading protocols and execution mechanisms, depending on the nature of the order and the market. With a flexible solution such as smartFI, smartTrade helps them to automate their workflows. We also see some buy-side firms looking for tools to manage the liquidity they bring to the market.
Finally, buy-side firms want to use more of the data that is now available to them, whether to look at current and historical prices or to analyse their trading activity. Sophisticated analytics tools, such as smartAnalytics, are some of the biggest requirements for fixed income traders today, and not only because they are something regulators want to see; they are also likely to be crucial to doing more cost-effective business and ultimately to improving returns.
What are the key drivers when buy-side firms are considering choosing smartTrade?
Buy-side firms come to smartTrade Technologies in need of direct connectivity to a varied number of liquidity venues, whether to perform Straight Through Processing (STP) to find liquidity or to obtain better pricing. They want a system which helps them aggregate market data and a platform to execute their orders, which is most commonly named an Execution Management System (EMS). Because many buy-side firms already use several systems, one of their priorities is to find flexible and easy-to-integrate solutions. Connectivity is essential, whether downstream to connect liquidity sources or upstream to feed information back to the Order Management System (OMS), Portfolio Management System (PMS) and post-trade systems.
Having hosting capabilities plays a big part, as deploying in the cloud can provide rapid time to market, enabling firms to get connected quickly and to save costs. They want to invest in a platform capable of handling multiple workflows, including staging, negotiation, click-to-trade and a smart view of the current liquidity. Trading is increasingly taking place cross-border, and many trading desks have combined to provide multi-asset trading; they need workflows which support this. Lastly, they want powerful analytics and access to historical data to run their pre- and post-trade analysis.
To conclude, what would you say differentiates smartTrade from other vendors in the market?
With 20 years of experience in FinTech, smartTrade Technology is a trusted technology partner. We work with a variety of clients ranging from banks, brokers and hedge funds to proprietary trading desks. We have a global presence with seven offices around the world and hosting capabilities in all the main financial hubs.
We have functional and industry experts who provide buy-side clients with guidance to ensure that their technology projects successfully meet regulatory requirements and the business functionalities needed.
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