Seeing through the pricing mirage

Byron Cooper-Fogarty, CEO, Neptune

Traders and PMs found real value in using axes over onscreen prices during the recent liquidity crisis.

Neptune’s streaming of dealer axes continues to grow in value to buy-side traders and the wider investment function. March’s sell-off saw accuracy in bond pricing reduce considerably in many electronic venues and consequently dealer axes became more relied upon.

Byron Cooper-Fogarty, CEO of Neptune tells The DESK how engagement with users is evolving, and what advantages that is conferring on the asset management community, and their broker-dealers.

What do you think the recent market turmoil tells us about electronic trading?

It showed that technology is needed to support trading relationships. People who proclaim that fixed income has finally moved to the digital age from the relationship age, are probably missing the point. The fact that you do a lot of smaller trades electronically does not mean that you are going to walk away from the major relationships you have built up over decades.

How were firms using Neptune in the crisis?

When you have a one-sided market such as in March and April, through Neptune, traders and PMs were able to find which dealers had recently been active on the side they wanted, enabling them to find and build meaningful conversations with dealers. They may not have had that conversation if it wasn’t for the data that was flowing through to them and directly into their systems. When the lockdown happened, dealers were something like 70% to 80% offered versus bid. Trying to find bids for things was almost impossible, but again Neptune allowed them to have meaningful engagement and try to get something done.

What feedback did you get during the volatility?

The feedback we got during March and April was positive both from buy-side trader users as well as portfolio managers. Neptune was able to give them insights that they hadn’t been able to get during market turmoil in the past. We were affected like anyone; the dealers obviously don’t supply as much data or liquidity during a crisis, and understandably so. Nonetheless, that connectivity and the ability for traders and portfolio managers to get trading information and insight into their core workflow tools, proved invaluable. When that information is part of the investment process, it allows them to readily make more informed decisions.

How does the increased scope of use affect your offering?

It is a major reason why we are more embedded within major buy-side firms across the UK, Europe, and the US. Around one third of clients are connected through the application programming interface (API) to get information directly into portfolio construction tools or pre-trade models that they have built on the quant side. It gives that speed and certainty, which has been a huge win for us throughout the crisis. A lot of people will go back to what they know well when under stress.

We saw funds shuttering when they were unable to calculate NAV if they were not able to get prices or price data from the market; are you seeing Neptune data applied to that problem?

The extent to which people are using Neptune for that sort of calculation we can’t know, but if they are not they should be, because ultimately data supporting client inflows and outflows needs to be as real as possible. It does not get any more real, in pre-trade terms, than real-time axes that are coming direct from the dealers. So we certainly encourage our clients to use it as extensively as possible. The buy-side clients that get the most out of Neptune, are the ones that have multiple connections and use it in multiple ways across the business. Connecting to an OMS is great for traders and PMs; an API can be great for traders and fantastic for portfolio managers, particularly on the quant side. Ideally, we want clients taking the information and using it internally the way they should. On the flip-side of that, the deeper you are within the organisation, the more this provides value to the sell side. The beauty of Neptune is the more the sell side put into it, the more the buy side get out of it, and vice versa.

Relationships clearly matter but the electronification of the market continues; how would you characterise the evolution we are seeing?

Even in normal markets it is true that relationships are key, particularly for larger size trades. It is important for us to be a channel to those relationships, not a participant in them. The Securities and Exchange Commission has confirmed our status as not being a broker-dealer via a no-action letter, and we do not want to be a regulated trading venue. We are looking to utilise our existing connectivity between sell side and buy side to allow people to digitise some of those easier-to-do block trades. As a market utility, we act like a phone line or a messaging system, we are providing connectivity.

Do you see Neptune reinforcing relationships?

It allows traders to have an indication of how likely their order, be that buy or sell, is to get done. It allows PMs to be a bit more opportunistic. There might be a better option out there that they hadn’t considered, and it makes sense to try and achieve some alpha from areas not previously explored. In the past, they have not necessarily had that information to hand, because historically it’s been the preserve of the execution desk. Forward-thinking heads of trading want the PMs to have the data. It makes the trading and PM relationship even more meaningful at asset managers. PMs make more informed decisions and when looking at those opportunistic ideas, if they are looking at real-time axe data, something that tells you, size and direction and level with a pretty good indication of where you can get filled, that’s pretty powerful. It’s providing confidence and certainty.

©The DESK 2020