Fixed-Income EMS Evolves with Data, Protocols and Automation

October 3, 2022 | By: Iain Smith

Fixed-income data feeds have proliferated in the last few years and more institutions execute orders on electronic trading venues with diverse protocols. Yet, managing data and sourcing liquidity across disparate platforms has become more challenging.

By Stefano Dallavalle, Fixed Income Product Manager, EMEA – FlexTrade Systems 

There is uncertainty in the bond market lately, with signs that spreads are widening, and liquidity is harder to find. With the Federal Reserve and European Central Bank (ECB) raising interest rates to fight inflation, traders worry this could send global economies into recession, causing a sell-off in the bond market. That is why it’s important to bring in data from every angle to price a bond, that may only trade once a month or every 20 to 30 days, so that bond traders have the tools required for well-informed price discovery.

Fixed-income data feeds have proliferated in the last few years and more institutions execute orders on electronic trading venues with diverse protocols. Despite lagging the equities markets in adopting electronic trading, the response to the pandemic has pulled the fixed income markets five years into the future, reported The Financial Times.

Electronic trading has transformed the bond market accounting for about 40 percent of high-grade corporate bonds in 2021, up from 30% in 2020 and 10% in 2011, according to the FT citing data from research firm Coalition Greenwich. In addition, with more brokers using algorithms to price bonds, smaller trades are part of the price discovery process.

Yet, managing data and sourcing liquidity across disparate platforms has become more challenging.

Head traders attending the buy-side oriented Fixed-Income Leaders (FILS) Summit 2022 this week are contending with a complex, nuanced landscape comprised of many different asset classes. In today’s bond market, liquidity is fragmented across different venues and protocols, which include direct-dealer connectivity, chat, and broker axes. in contention with traditional RFQ and all-to-all functionality.

As a result, there is increasing demand for data aggregation and venue connectivity. Many fixed-income trading desks are looking to execution management systems (EMSs)to apply automation to their workflows, leaving traders to focus on illiquid instruments. In fact, EMSs are at the crossroads of providing an integrated solution that connects with multiple venues, protocols, and data sources.

An established EMS’s true advantage is aggregating all the disparate data sources across the bond market ecosystem to build a consolidated view of the marketplace. Since bond data is always changing, the value of an EMS is also having a wide range of pre-certified integrations and a strong pipeline of innovation to cater for the evolving role of the fixed income trader of tomorrow. The buy side doesn’t always have a full picture of the marketplace since the OTC bond market relies heavily on pre-trade data from bilateral relationships and multiple data sources, and an EMS is well positioned to consolidate, store, and digest this data for better informed trading decisions.

Closing the Data Gap: EU Consolidated Feed  

However, data gaps persist in Europe where there is no consolidated real-time feed across the bloc with many different trading platforms and disparate regulatory jurisdictions.

European regulators have called for more transparency to shed light on opaque corners of the bond market. In June, the three major venue operators, MarketAxess, Tradeweb, and Bloomberg, said they are exploring a single feed for corporate and government bonds in the European Union, reported Reuters. “The EU plans to amend its securities laws, mandating a single price feed to better knit together its capital markets,” said Reuters.

A single price feed or consolidated tape would pool and organize data from different exchanges and market makers, aggregating a bond’s trade volume and price changes across different venues, reported Financial News. There will be value in this real-time feed over time as the universe of bonds eligible for transparency grows along with the ever-increasing adoption of electronic trading in the fixed-income space.  As a highly customizable solution, FlexFI EMS will be ready to integrate with this feed, adding to our already data-rich and evolving pre-trade bond widget.

Pre-trade data is also in high demand, but the quality and frequency has proven difficult for independent providers to deliver, suggested The Desk. But advances are occurring in pre-trade data. One of the major findings from The Desk’s 2022 Trading Intention Survey is that Neptune, the sell-side axe and inventory streaming service, has seen its usage jump among buy-side firms. According to The Desk’s survey, Neptune is the most highly used independent pre-trade data source.

According to this year’s survey, 58% of buy side firms reported using Neptune, up from 36% in 2021, with 30% saying it was a major source, up from 17% in 2021. Other fintech entrants showed stable growth, including Symphony, BondCliQ, LumeAlfa (formerly Algomi) and Glimpse Markets. Recognizing there is high demand for high quality pre-trade data, FlexTradeFI will continue to partner with innovators in this space.

Dealer Selection

While FlexFI integrates with different data sources or pricing feeds that dealers send to us directly, bilateral trading is another trend that FlexFI is responding to. Dealers and clients are showing greater interest  in bilateral trading as an efficient way to execute against actionable prices via the EMS. The next step is using that data intelligently to aggregate those data points around dealer selection.

Applying smart tools to dealer selection has become popular in Europe. For example, when trading on a venue with RFQ (Request for Quote) protocol, a buy-side trader is going to be more selective on which dealers it requests quotes from, based on increasing size. Our EMS can guide clients by recommending dealers based on parameters, such as a) their response or hit rate based on a client’s historical data, b) their streaming of pre-trade pricing. Combining historical and real-time data from multiple sources in this way is a powerful tool for recommending dealers.

At the same time, many clients are realizing that fixed-income market-structure is evolving to the point where they need an EMS to automate their workflows. Where does automation fit into FlexFI EMS?

Automation Strategies

An EMS offers the buy side an opportunity to set up execution strategies for low-touch and high-touch orders. In the case of liquid instruments, an investment manager with a high volume of orders on the EMS blotter can apply rules to automate the execution of low-touch orders. This is where automation has its sweet spot, leaving the trader to focus on the less liquid items with higher value.

One of the differentiators of using an EMS vs. a single venue to build automation strategies is that we make use of all the data points that a client has access to. Whereas a single venue has access to all the historical data and transactions that happen on its platform, it can’t connect to multiple sources from data vendors or other venues.

Because the EMS has access to all new protocols and different venues it can allow the bond trader to build different automation strategies. For example, an automation strategy can incorporate multiple protocols, venues, and data points to seek the best liquidity available while maintaining integrity through data-driven dealer selection.

For a particular bond, a trader may want to search for liquidity across multiple venues, rather than send the order to a single destination. The EMS allows the trader to build multi-venue and multi-protocol strategies themselves.

One of the innovations we will demonstrate at FILS, is the ability to pull in different parameters, create your own fixed-income strategies, and automate routing to those strategies. Like the concept of an algo wheel, which can automate routing to specific broker algos, our Fixed-Income Smart Order Router (FISOR) enables the trader to route orders to different FI strategies. Maintaining a single set of automation parameters within an EMS, allows fixed-income desks to consolidate and adapt a single set of parameters, rather than maintain fragmented automation strategies across multiple venues, which is an inefficient and time-consuming process.

However, these innovations are emerging at a time when both UK and EU regulators are seeking to clarify the definition of a multilateral trading facility (MTF). On Sept. 22, the UK’s Financial Conduct Authority opened a consultation to provide guidance into the trading venue perimeter. The consultation, which is part of HM Treasury’s Wholesale Market’s Review, coincides with a broader consultation by ESMA which began in January to clarify the trading venue perimeter and to level the playing field under MiFID II rules. However, not every software provider that displays bids and offers on a screen is functioning as a trading venue. EMSs exist to make fixed-income trading more efficient for the buy side, establish bilateral connections with bank liquidity providers, and improve price transparency. If technology providers are required to register as authorized trading venues and made subject to MTF compliance rules, this will impose burdens on EMS providers and potentially stifle innovation.

With the pace of change escalating, clients are seeing the value that an EMS plays in seeking liquidity across a fragmented landscape. Not only does the EMS help the buy side interact with various sources of liquidity, but it also brings efficiency and interoperability to the buy-side desktop. Instead of toggling between multiple windows, and losing the context of each application, efficiencies can be gained from consolidating all their screens and workflows into one EMS screen and marrying that with other innovations. Looking to the future, we expect the broker-neutral EMS to become an essential software platform for navigating fixed-income markets.

About Stefano Dallavalle

As the Fixed Income Product Manager for FlexTrade’s fixed-income EMS solution, FlexFI, Stefano Dallavalle focuses on working closely with clients and prospects to build out functionality to meet and exceed market requirements. Stefano works alongside the broader FlexTrade Fixed Income Product Management team within FlexTrade’s London office. His recent focus has been building out FlexFI’s workflows, automation capabilities and data visualization, and the overall experience the solution delivers to Fixed Income traders.