The Need to Know:
- The corporate bond market is seeing the emergence of a new way of trading as banks have started streaming executable bond prices to real-money clients.
- AllianceBernstein is taking in streams from JP Morgan and plans to connect to more dealers this year.
- Bank of America, Barclays, Citi, Goldman Sachs and Morgan Stanley are also in the business but the service is limited so far to just a handful of clients.
- Asset managers, under severe cost pressure, want to save money where they can and believe new trading protocols like streaming will help.
- Technology to connect with different banks and trading platforms is still developing but is seen as a key element in the future growth of this trading protocol.
In today’s on-demand culture, consumers receive what they want, when they want it. Music and television is piped into our houses in personalised streams. Social media feeds are tailored to our tastes.
This revolution is now extending to an unlikely area of the financial markets: corporate bonds.
Over the past 12 months, six of the largest corporate bond dealers have begun streaming live, executable prices directly to a small number of their top clients, in a development that threatens to upend the traditional methods of trading, via phone and screen.
“In time this could be a seismic shift, but it is just starting,” says Sonali Das Theisen, head of fixed income market structure at Bank of America. “The whole market is not moving in this direction yet, but we’re at the precipice of change to create more efficiency.”
Bank of America began streaming corporate bond prices to buy-side clients in the fourth quarter of 2019. Barclays and Goldman Sachs are also understood to be offering direct liquidity streams of corporate bonds to select clients.
Among investment managers, AllianceBernstein already receives quotes for investment grade and municipal bonds direct from JP Morgan and is looking to add streams from a further five dealers, including Citi and Morgan Stanley, in the first half of the year.
The shift to electronic trading for fixed income products has led to a big increase in available data. But some buy-side firms have struggled to develop their internal technology to keep pace with changes in the market. As a result, tech vendors are pitching new execution software to consolidate the avalanche of platforms, trading protocols and data coming clients’ way.
“The number of venues that you need to connect to has gone up dramatically and you need to connect to all of them,” says Paul Reynolds, head of fixed income at TradingScreen, whose service connects to 15 platforms in fixed income. “In turn, the amount of incoming data has also gone up even more. So you need to have an infrastructure that not only connects to all of the venues but can consume, store, match, and retrieve industrial quantities of data.”
All investors use order management systems which are capable of connecting to different trading venues and data sources, staging orders, and enabling straight-through processing to improve efficiency. But these systems are unable to determine the best price to trade at, and to auto-execute those trades. For this job, asset managers need EMSs, say tech vendors.
Fixed income EMSs do exist. Vendors, including Bloomberg, Charles River, FlexTrade, Portware and TradingScreen, offer them and some are widely used by asset managers. However, experts say these systems cannot route orders to multiple venues, which limits their usefulness.
Some asset managers are busy creating their own tech instead. AllianceBernstein has done just that, building an EMS for investment grade and municipal bonds. It plans to roll out the system for the rest of its fixed income franchise in the first half of 2020. Tim Morbelli, a senior credit trader at AllianceBernstein, believes developing the firm’s own EMS –rather than buying one off the shelf – was the right call.
“There are EMSs out there but they come from the equities ecosystem and they don’t have the ability to release orders to multiple venues, so they’re not perfect,” he says.
In the past, this would have been too expensive a project for asset managers to consider. It may still take months to build, but Morbelli says the cost is a fraction of what it was five years ago.
Vanguard, too, is weighing its options about how to deploy an EMS.
“We’re thinking a lot about it,” says Barrickman. “There’s not really any off the shelf or dominant provider in that space right now, but it’s definitely the next step in the evolution.”
Alvarez at Western Asset is also exploring the possibility: “We, as a firm, are looking at an EMS that would allow us to connect directly to different dealers and to execute on direct streams or live streaming markets.”