The decrease in equity trading volumes and the search for relatively low-risk investment products is sparking greater interest in fixed income as an asset. BondOne is a suite of solutions designed to meet the needs of this growing market.
Events over the past two years have had a profound impact on the world’s financial markets. The general increase in risk aversion has altered the way many investors view numerous assets. This appears to have triggered a move away from equities and into more stable assets, such as fixed-income and other interest rate products. Whether this is a cyclical or structural development is not yet clear. But it will take a long time for confidence to return to the levels they once were and as result portfolios will remain far more diversified across assets than they once were.
Importantly, the increased appetite for ‘safer’ fixed-income products that has materialised has broadly come at the same time that many of the market’s once dominant participants, the larger dealers, have scaled back the amount of risk they are prepared to warehouse. In an article written a year ago in Advanced Trading, Larry Tabb, the founder of the eponymous consultancy group, stated: “The write-off of billions of dollars by dealers will force three things to occur: Dealers will increase their investment in risk management, new risk management strategies will force dealers to reduce their proprietary trading…and dealers will reduce costs in line with revenues….Sounds like the market is in need of an exchange, ECN or interdealer platform open to investors, doesn’t it?”
Tabb added: “I am not saying that developing an agency-exchange model is a slam dunk; however, it may be time for the dealers to think about an alternative to always being a principal.” According to Gerald Belpaire, Head of Fixed Income Solutions at SunGard Global Trading, Tabb’s prediction is starting to become a reality. “We’re seeing a lot of interest from existing clients and from dealers who are looking at entering fixed income for the first time. There are definitely signs that we are seeing the emergence of what could be called agency-brokers, or more correctly riskless principals,” he says.
Meeting the technical challenges
But there are complexities to consider before any company can establish a fixed-income operation. There is no single fixed-income market, even at national levels. It is incredibly fragmented and a huge proportion of activity takes place over-the-counter. This is one reason why fixed income has not adopted electronic trading at the same pace as other markets.
“The simple fact is that there is a vast number of bonds in issuance. In the US, there are more than 2 million different securities in circulation. Even smaller markets can have tens of thousands of bonds outstanding. It is not easy to bring all of these together. The market is made up of specialists and all of their skills need to be brought together for an online platform to succeed,” says Belpaire.
According to Belpaire, there are three key factors to consider:
- Access – connectivity to the market places, whether electronic or on the phone, and sometimes by e-mail.
- Trading – the ability to keep monitor all client orders submitted (OMS) and those sent for execution (EMS). For market makers, this should include a pricing capability, as well as position and risk management.
- Distribution – the ability to offer electronic access to fixed income markets for both institutional and retail customers. A single dealer platform may have multiple feeds from liquidity providers, while presenting a single, proprietary brand to clients.
“The trading platform has to be able to handle all types of orders, however they are submitted. Some are still sent in by email; all the orders have to be executed in the most efficient manner, whether by telephone or electronically. The distribution platform also has to be able to help the clients find the bonds they are interested in, and let them submit orders and RFQs. So it has to have a powerful search engine, which can also be used to construct portfolios, either suggested or client-specific to match liabilities or other targeted returns,” explains Belpaire.
BondOne addresses all of these issues, from initial connectivity, and on through trading to distribution. It also provides a full audit trial, which has become an essential requirement, “It is really important to have a flexible solution to handle all of the needs and complexities of what is a rapidly evolving market, but one which has sometimes arcane business methods. The whole idea behind BondOne is simple. It is to provide enabling technology to those people who want to enter the market and for those already in it, to deliver greater efficiency,” concludes Belpaire.