Moving a fixed income order from a portfolio manager to a counterparty is becoming increasingly electronic, putting more pressure on trade execution tools.
“Five years from now, the execution management system (EMS) in fixed income is going to be required to provide more functionality than in any other asset class,” asserts Lynn Challenger, global head of Trading & Order Generation at UBS Asset Management. “I say this because fixed income as an asset class is really a collection of security types with far more market structure and liquidity diversity than equities. Further, the changes to pricing mechanisms, market participants and technology are shifting at a much more rapid pace, but those changes are inconsistent across the broad spectrum of security types.”
Today an order is moved to the trading desk via an order management system (OMS) and is transferred from an OMS to a venue, or flows from an OMS to an execution management system (EMS) which facilitates that transfer.
The value of an EMS in fixed income is growing rapidly, as buy-side traders search for greater efficiencies in trading this complex asset class.
“When people talk about automation in fixed income, it is often the very last step in the execution process, which replaces the send to the RFQ vendor, gets 3-50 prices, and selects the best one,” says Challenger. “What is needed is a system that intervenes on the trade further upstream. A good automation system needs to evaluate the liquidity characteristics of a security and assign it an execution pathway – manual or automated. Once this decision is made, the system will need to categorise the order so it can assign an execution strategy, and then follow the process of how a trader would execute given all the factors.”
Connectivity is key in this process; the link between the O/EMS and the trading platform will typically be a FIX Protocol connection, creating a standardised transfer of information. The straight-through-processing (STP) seen in equity markets has been elusive for bonds, however, O/EMSs can still provide a valuable service to the buy-side trading desk.
“To some extent, fixed income venues like the fact that the buy side is interacting directly with them, and their dealers via RFQ from their own venue platform, which does mean an extra step,” acknowledges Chris Hollands, head of European Sales and Account Management at Tradingscreen. “It’s possible to see interest in a given bond within the EMS graphical user interface (GUI), and if there is an interest you can then interact with it. But in the main, the EMS goes into the fixed income venue where the actual negotiation of the trade takes place.”
In some cases OMS and EMS tools are pre-integrated, with Bloomberg’s suite, and Simcorp/TradingScreen.