By James Jockle, Chief Marketing Officer, Numerix
Max seems to love his job as a junior bond trader at a bulge bracket bank. In 2018, his first year on the job, he handled thousands of trades worth multiples of billions of dollars. He didn’t take a single vacation day, never called in sick, and not once showed signs of slowing down.
That’s because Max is an algorithm. He is the most visible evidence of the impact that technology is having on fixed income markets, specifically, the trend towards electronic trading, which is beginning to play a big role in those markets. However, while the adoption of electronic trading in fixed income is making a lot of headlines, it is not the only trend making an impact.
I recently sat with two fixed income market experts, Kevin McPartland and Dan Connell, both managing directors at Greenwich Associates, a provider of market intelligence and advisory services to the financial services industry. We engaged in a revealing discussion about technology trends in fixed income, focusing on the more salient issues at play today and that will continue into 2019. In addition to electronification, we included in our conversation the use of market data and the growing adoption of the public cloud.
Taking Advantage of Innovation
I began our discourse by citing one of the key findings of one of their own Greenwich reports, Technology Opening Doors for Fixed-Income Dealers, which states that 26% of investors trading in U.S. government bonds in 2017 was executed with non-bulge bracket dealers, up from 18% in 2013. When asked what is driving that trend, Kevin McPartland explained that because there is an increasing appetite for electronic trading (and a big thanks is in part owed to the colossal piece of regulation known as MiFID II), there are now new technologies available to the market that enable new players, such as regional and middle market dealers, to get on a level playing field with the bulge bracket banks—technology that allows them to provide increasingly aggressive pricing and fast execution, and they are certainly taking advantage of it.
“These technologies are lowering barriers to market entry and reshaping the competitive landscape to a certain degree,” explains McPartland. “New market participants can now come in and provide a level of service to the customer that they couldn’t have before.”
It’s a big change, and one that is occurring for another reason as well. “The large global banks are still, of course, a big portion of the market, but what we’ve seen since the financial crisis is that a lot of those banks have decided that certain markets or products are just not that profitable for them anymore, so they pulled back out of those products and markets,” says McPartland. “This opened the doors for the non-traditional market participants. And Institutional investors, both large and midsized, are increasingly going directly to those regional banks for execution in those markets.”
We also discussed how it wasn’t that long ago when all trading was conducted over the phone between clients and their dealers, but how that has changed in recent years as the advent of e-trading has led to an obvious decline in voice trading, and is expected to soon become the new standard for fixed income trading. That led me to ask whether, if voice trading is dying, does that mean the relationship side of the business—the human element—is dying?
McPartland was quite assertive in his response, “No, relationships still matter as much as they ever did,” he posited. “Even if you are trading algorithmically, trusting the people on the other side of that algorithm—who built it, the people who are helping you understand how to use it—it’s all very important. In fixed income, specifically because it is still an over-the-counter market, even though it is electronifying, there is a bilateral relationship there and the people want to maintain those relationships. Trust matters as much as it ever has.”
The shift in dynamic between traditional market-makers and the new players is a trend that is certainly expected to continue in 2019. But then that brings the question of whether this new phenomenon is the particular catalyst that is going to truly disrupt the bulge bracket in terms of fixed income dealing.
He explains, “It is actually becoming increasingly difficult to disrupt the bulge brackets in any real significant way. If you look back 15 years ago, before the crisis, there was less of a concentration of trading with the top bulge bracket firms than there is today. It’s gotten more concentrated now. Interestingly, an intended purpose behind some the new regulations that came to bear, such as Dodd-Frank, was that they would democratize the markets a bit more and make it easier for other participants to get involved. But in reality, it has done the opposite.” Why? McPartland further suggests that because the regulatory requirements are so onerous, it is difficult for a non-traditional market entrant to come in and be disruptive, plus they could never really compete in a large scale against the global breadth of those banks and the size of their balance sheets. “Outside of regulators actually breaking up the banks, I don’t think there will be anybody unseating them.”
Market Data Feeds
An obvious statement is data has always been at the center of trading decisions. But what we see as a long-term trend is the demand for greater amounts of data as well as an increasing focus on the quality of consolidated data feeds—its completeness, accuracy and timeliness. But acquiring greater and better data does not come cheap. , “One of the key priorities of capital markets firms is cost management,” says Dan Connell. “So, one of the biggest complaints we noticed is the cost of market data feeds.”
But I wondered, is the cost of consolidated data feeds the biggest factor in the decision when evaluating data providers? “In fact, our research unveiled that data quality is the biggest factor in the decision when evaluating consolidated feed providers, but cost was #2,” Connell shares. “There is real value in who can provide the best data.”
So, what is the definition of data quality? You would think it would be a simple answer, but it always seems that when the question is posed, it tends to turn into a long discussion. Helpfully, Dan provided a clear, high level response. “It’s about having the right range and depth of coverage and to be able provide it in a bespoke way to the market participant client,” he explains. “Plus, the technical quality of the data, such as the ability to provide the data with the right latency, is another demand. What it really comes down to is that customers want to trust the data—they want it to be reliable and consistent across different markets and consistent with local market practices across the world.”
Connell also mentioned that the market for consolidated data feeds is poised for significant growth. He cited a panel survey conducted during a recent Greenwich Associates webinar, Market Data Ecosystem, in which nearly 75% of respondents expect to spend more for data going forward. In the same webinar, participants were asked how important new technology and innovation are for consolidated feeds. Ninety percent responded it was “important to very important,” perhaps a sign that market participants are urging their companies to continue to keep investing and migrating to newer technologies.
Adoption of Public Cloud
The growing use of market data is certainly a recurring theme in the markets, but so is the adoption of the public cloud, which is rapidly gaining prominence. So, are we at a point where we can officially say the cloud debate and the barriers to cloud are over?
Connell believes so. “I think we can say that the cloud debate and the barriers to cloud are pretty well over. Public cloud, in particular, is starting to find acceptance for market data as the cloud matures. All of the major financial institutions are embracing the cloud in some manner for some services, and far and away the use of the public cloud is coming to bear in a significant way.” In the same Greenwich Associates webinar cited earlier, a panel question revealed that 84% of market participants are either already using the public cloud or investigating using the cloud.
Powerful Forces at Play
Powerful forces are clearly at play here relating to innovation and technology, regulation, stiffer competition, and data needs and challenges. Each of these are playing a role in reshaping the capital markets landscape and continued industry complexity lies ahead.
In my view, as we enter 2019, market players need to develop and implement a forward-looking strategy that assesses threats and opportunities and that offers tactical responses to current industry trends.
James Jockle leads the company's global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.
Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.
