Getting a clear picture of the complex corporate bond market means that at some point, a lot of information has to be brought together and the complexity of decision making has to be reduced to a manageable level.
Speaking with traders about the systems they use to do this, it is clear that for some owning that technology that does this is perceived as a potential advantage they can use to access liquidity through better execution management, because they are able to establish levels of automation and efficiency according to their own agenda. For others, technology on the trading desk is largely focused on order management and connectivity with third party systems – often trading venues – which in turn provide much of the execution management.
In equity trading, the buy-side desk is supported by their sell-side counterparty which provides a route into a market, and so the broker sits between the buy-side desk and the venue. Fixed income markets are principal based, so buy-side firms trade against their sell-side counterparties; and the trading venue sits between them. In the former, the broker-dealer is able to provide trading systems and algorithms which allow it to automate the trading process, reducing the cost of trading and potentially improving performance. Each broker is competing against the others on the client’s list to find the fast/cheapest/most complete was of filling the order. In the latter market i.e. credit, it is the venue which provides these automated trading and order routing tools. Instead of many brokers trying to find the best liquidity on a few venues, a few venues are trying to source the best liquidity from tens to hundreds of brokers.
Another aspect also exists; in credit the buy-side desk can go directly to the broker by phone or electronic message if venues are not providing an adequate service. This can include electronic access to directly streamed prices from dealers. By contrast, in equities the buy-side firm cannot go directly to the market operator, only via a broker’s licence using a direct market access (DMA) arrangement.
There is no right or wrong way of setting up the credit trading desk, each patter has their advantages. A new complexity added to this has been the clarification of rules around what constitutes a trading venue in European markets. These rules potentially bring some trading desk systems into scope as a trading venue – with accompanying regulation – dependent on the extent to which they are processing orders from multiple counterparties, and are therefore multilateral systems.
Two clear paths are possible. In the first, the buy-side trading desk holds all of the technology and functionality internally, in order to not only manage pre-trade liquidity and price analysis but also order and execution management within its own tech stack. The second is to handle pre-trade analysis and order management on the desk with the appropriate systems, and then to use the execution tools – such as automated trading, auto-hedging, all-to-all trading, portfolio trading and request-for-quote execution – on trading platforms.
©Markets Media Europe 2023
