Now in its fourth year, the 2018 Fixed Income Leaders Summit (FILS) drew record attendance from buy-side firms, trading venues and technology vendors. Charles River has participated in this event since the start, and we’ve worked with our buy-side clients and strategic partners to address the significant challenges facing FILS delegates and their firms. This Insight discusses some of those challenges and Charles River’s approach to empowering fixed income portfolio managers and traders during a time of rapid and disruptive industry change.
Exploiting Synergies in Order and Execution Management
FILS attendees have had impassioned debates on the future of buy-side order and execution management systems since the inaugural event in 2015. On one side, the traditional best-of-breed approach advocates for multiple, asset class-specific EMS systems connected to an OMS. The theory there is that each system has unique requirements that would be ill-served by a common platform.
Charles River took the opposite position early in the debate, arguing that the enormous synergies between order and execution management systems had to be exploited, and launched the first multi-asset OEMS in response. That position has gained broad industry acceptance over time, with increasing numbers of vendors now offering an OEMS.
An OEMS eliminates the need for multiple EMSs, and provides unprecedented visibility into the trade life cycle on a single blotter. A consistent user interface that is “re-usable” across multiple trading models ensures that buy-side traders need to learn only one interface, and delivers a transparent and broad view of inventory and liquidity. The OEMS also automates data capture, helping to eliminate errors and inefficiencies from having to re-enter data in separate systems.
In addition to providing connectivity to venues and dealers, the OEMS provides a centralized repository of trade and order information, serving as an ideal platform for aggregating quote and inventory data to facilitate trade analytics and execution analysis.
Execution Analysis and Best Ex: Regulatory and Cost Drivers
Already a popular topic at FILS back in 2015, execution analysis continues to grow in importance, and has expanded beyond helping firms reduce trading costs and understand which venues and broker/dealers they should be using.
Now, regulations like MiFID II are forcing firms to demonstrate best execution for their institutional and retail clients. This requires firms to capture, store and aggregate large volumes of trade and market data in order to understand and improve execution.
Unlike transaction cost analysis (TCA) for equities, there is no predominant execution analysis methodology in fixed income. Flexible and open technology is key, letting firms define and adapt their execution metrics based on their investment process, the instruments they trade, and the trading venues they use. Built on Charles River’s centralized data repository, our multi-asset OEMS provides an ideal platform for capturing both externally sourced and internally generated trade, pricing, axis and order data.
“Fixed income buy-side firms increasingly have the capability to analyse data to achieve a better outcome for clients and to satisfy regulatory requirements. The reason is simple: until recently data was sparse, now it is becoming more and more abundant.”
Doing More with Less: Improving Collaboration and Communication
An integrated front and middle office technology stack that includes portfolio, order and execution management enables closer collaboration between traders and portfolio managers. Working from a single platform makes it far easier to incorporate generic securities in portfolios, an increasingly valuable benefit now that broker/dealers no longer warehouse inventory.
An integrated platform also facilitates compliance with new regulatory requirements for trade and transaction reporting, documenting best execution, and managing commissions. By standardizing their technology stack, firms become far more responsive to inquiries from regulators, thereby retaining the trust of their institutional clients.
Innovative Solutions for Sourcing Liquidity
Locating and sourcing liquidity continues to be a perennial topic of vigorous discussion and debate at FILS. Post-2008, fixed income dealers significantly reduced their bond inventories, driven by cost pressures and regulatory changes. This hampered price discovery and impacted liquidity across global credit and rates markets. In response, over 100 fixed income venues have launched, with the goal of capturing buy-side order flow. While new execution options are a welcome development, the sheer number of venues has also increased market fragmentation.
Charles River launched the Fixed Income Inventory Hub to provide investment firms with an effective solution to these challenges. The Inventory Hub processes and aggregates inventory across a number of leading dealers and venues. Clients can view this inventory in the OEMS, receive updated indications of interest (IOIs) and quotes from dealers, and place orders for a full range of fixed income asset classes, including investment grade, high yield, emerging market, and munis.
“While many firms have a heterogeneous best-of-breed infrastructure, we are seeing firms increasingly consolidate their technology stacks, reduce the number of platforms, and combine their investment and trading technologies onto a single platform.”
Playing the Long Game
Looking back at all that has happened since the inaugural 2015 Fixed Income Leaders Summit, Charles River has introduced numerous technology advances that help firms efficiently source liquidity, more effectively leverage growing data volumes, and demonstrate best execution to satisfy regulatory mandates. These development efforts have resulted in a complete multi-asset solution supporting the demanding requirements of the world’s largest investment firms, asset owners and wealth managers.
Challenges remain, especially with market liquidity and fragmentation, and while the future is unknowable, Charles River continues to invest heavily in R&D, which enables us to build the deep domain expertise required to provide innovative technology solutions to our institutional and wealth clients. We have also partnered with various fixed income venues and dealers to establish a solid foundation for buy-side firms navigating the rapidly changing regulatory and market landscape.