Tackling the cost challenge in fixed income trading

David Parker, MTS Markets International

In today’s highly competitive and cost-conscious fixed income market, small and medium sized institutions can struggle without the efficiencies of scale which large institutions are able to take advantage of. Unfortunately, the models of many trading platforms are not designed to be accommodating for these more modestly sized firms. In this article, David Parker, Head of MTS Markets International, explains how the MTS BondsPro platform can provide small and mid-size institutions with a competitive edge.

According to the most recent earnings figures1, 2020 was a highly successful year for US banks. Many of Wall Street’s best-known names reported capital market earnings to have increased quite significantly relative to previous years, with fixed income leading the way.

Under the surface, however, many institutions are still facing significant headwinds which are putting pressure on fixed income profits.

Clients have become increasingly demanding when it comes to execution costs and cost vs. value. Not only are trading desks faced with smaller margins, but they have also been forced to invest ever larger amounts of money in technology and data to increase trading performance and responsiveness. A recent GreySpark paper2 found that the cost savings of technology efficiencies at banks had been more than offset by the rising costs of data and analytics.

Room for manoeuvring around these challenges has been further constrained by the tighter regulatory requirements to which the markets are now subject, including higher capital requirements that have further increased the cost of trading.

While these pressures are felt across the industry, navigating them is often more difficult and cost prohibitive for small and mid-size institutions.

Large firms, of course, have bigger technology budgets and more specialists, making adopting new technologies and acquiring data easier. They may even hold ownership stakes in trading venues or data vendors, while smaller firms typically do not. In turn, most fixed income trading platforms are designed with large firms in mind and platforms may not have adapted their products, costs, or service models to suit the specific needs of smaller firms. This increases the cost burden on mid-sized and smaller banks who want to participate in the electronic fixed income trading markets.

Even something as simple as connecting to a platform can cause problems for a smaller firm. Onboarding a trading platform can be an involved process which requires a significant investment of time and scarce technology budget. Even the largest banks are reporting a need to hire many more new technologists in 20203. For smaller firms, assigning staff to onboarding trading platforms may mean other valuable projects are postponed. Once on board, many platforms are structured with upfront fees or minimums that require high volumes of trading, ideal for larger institutions but ill-suited to smaller firms.

MTS BondsPro is different. Because we work with a broad cross section of firms, we have found that clients can benefit from a more nuanced approach. We understand that the needs of all institutions are not alike, and have designed our platform to meet the demands of the largest institutions while remaining sensitive to the unique challenges of smaller and mid-sized trading desks.

BondsPro offers highly competitive pricing: there are no costs for providing liquidity or viewing market data, which enables traders to trade inventory and gain invaluable insights into the market without incurring any costs. Smaller institutions are therefore able to participate and scale up and down their involvement in the bond markets as needed in a cost-effective manner.

As an institutional all-to-all market, BondsPro provides access to a wide community of both buy-side and sell-side firms who together contribute over 100,000 bond prices at a time on over 10,000 securities. The all-to-all nature means that all participants get access both to broad Tier 1 streaming liquidity as well as the unique markets and axes from smaller or regional participants.

And all with minimum effort for the end user – the entire BondsPro market and community can be accessed in any way that suits institutions’ existing workflows and processes, including via a web-based GUI; Bloomberg systems like TOMS, eTOMS, and TSOX; or any number of other EMSs and APIs. This not only slashes onboarding costs but also ensures minimum change for traders’ workflows, allowing them to quickly derive value from the market.

Regional broker-dealers and similar institutions play a vitally important role in the fixed income markets, but the nature of their business means that the same products used and costs incurred by the largest firms are not always appropriate. At MTS, we are focused on ensuring that market participants of all sizes have access to a trading environment that is suitable for their business. If you’d like to find out more about the all-to-all model and how MTS BondsPro can supercharge your fixed income trading, please contact us to book a demo at contactus@mtsmarkets.com.

  1. https://www.nytimes.com/2020/01/14/business/jpmorgan-citigroup-wells-fargo-earnings.html
  2. https://greyspark.com/smart-data-analytics-set-to-play-key-role-in-reducing-buyside-sellside-trading-costs/
  3. https://www.bloomberg.com/news/articles/2020-02-25/jpmorgan-expects-net-interest-income-to-fall-slightly-this-year

Disclosure: Securities offered through MTS Markets International, Inc.