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Charles River Development has been an active participant in the annual Fixed Income Leaders Summit (FILS) since the inaugural event in 2014. The caliber of presentations, panel discussions, and networking opportunities ranks FILS as a key event for investment professionals, technology vendors and liquidity venues. In this series of Insights, we’ll discuss the latest developments and challenges facing market participants, framed in the context of what’s transpired since 2014.

If there is a silver lining to buy-side margin compression, it’s that firms have gotten serious about their search for cost savings and operational efficiencies. Trading desks have relentlessly downsized, while the job description for fixed income buy-side traders has been transformed radically, from trade facilitator to technologist. A key enabler to realizing those efficiencies is the electronification of rates and credit markets, akin to what happened long ago in equities.

Given the range of fixed income asset classes and the substantial number of bond CUSIPs relative to equities, fragmentation and illiquidity have proven to be significant barriers to electronic trading in the fixed income world. Against that backdrop and the aforementioned margin compression, the progress made to date is noteworthy and underscores how well the community of broker/dealers, alternative liquidity venues, buy-side firms, and technology vendors have collaborated to push fixed income trading into a new era.

“By automating the collection, aggregation and analysis of data, and then allowing low value, low risk orders to be executed without human intervention, traders are able to spend valuable time focused on alpha generative opportunities, or managing execution risk.”

Gareth Coltman, Head of European Product, MarketAxess
Source

A key enabler of electronic trading is the move toward tightly coupled order and execution management systems (OEMS), an innovation that Charles River has shaped and promoted over time. The OEMS provides FIX connectivity to broker/dealers and the growing number of liquidity venues, aggregation of quotes and pricing data across those venues, and a rich set of smart order routing and execution capabilities based on a firm’s trade history and a venue’s liquidity profile.

While e-trading has gained mainstream acceptance for bonds on the higher end of the liquidity spectrum, agencies, munis, and other less liquid securities, defy this trend. Furthermore, large trades in any asset class are still mostly negotiated by phone.

This year, the conversation among FILS attendees moved beyond electronfication to encompass fully automated trading. An increasing number of buy-side firms use algorithms to manage the entire trade lifecycle, from ticketing to smart order routing and execution, which enables traders to focus on larger or more complex high-touch trades.

In turn, trade automation has enabled a new productivity enhancing tool termed “portfolio trading“. Liquidity challenges can make it difficult if not impossible for portfolio managers to gain exposure to a particular CUSIP. As a workaround, the trader finds a group of bonds that adhere to certain characteristics – providing the portfolio manager with a list of securities matching the specified maturity, sector, coupon, issuer name, and rating.

Portfolio trading takes this one step further, enabling the PM to generate characteristic-based trades for an entire portfolio. All but the largest trades are then executed automatically, saving time and minimizing the risk of adverse market movement while the portfolio is being assembled or rebalanced.

Trade automation and portfolio trading are two examples of innovation-driven collaborations that are reshaping fixed income markets today. Committing significant resources to establishing connectivity to new liquidity venues and enhancing the trade automation and analytics capabilities in OEMS, will help buy-side firms to benefit from these innovations.

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