In The Fixed-Income Market, It’s About Man And Machine

Machines have made deep inroads into the financial markets, and are executing decisions way faster than the speed of thought.

While emptying trading pits did draw frowns initially, markets have adapted to machines quickly because of a significant advantage they bring – liquidity.

But humans will remain at the front and center of the fixed-income market, as trust is a real currency and humans are not ceding that advantage anytime soon.

Electronic trading and digitalization are helping build value in client relationships by enhancing liquidity, promoting alpha and creating operational efficiencies, was the refrain among market participants at a November 17, 2020, webinar on unlocking liquidity through people and machines.

The webinar was hosted by Greenwich Associates and anchored by Kevin McPartland, Head of Market Structure and Technology.

Undoubtedly, the past eight months have both highlighted the importance of dealer relationships and accelerated electronification of the fixed-income market in the aftermath of the Covid-19 pandemic.

The digital evolution
But as the fixed-income market evolves from analog to digital, how do market participants define electronic/systematic/automated trading and digitalization, given multiplicity of terms being used?

Maryanne Richter, Executive Director, Electronic Trading Strategy, Morgan Stanley, explained that fixed-income electronic trading at Morgan Stanley encompasses primarily trading via the request for quote, or RFQ, protocol. Systematic, or automated, trading is about using algorithms to create bond pricing, as well as systematic response to RFQs, she explained.

Digitalization, on the other hand, involves electronic exchange of pre-trade to post-trade data and analytics between the buy- and sell-side.

“A majority of our volume is traded over voice, human-to-human interaction, but we are starting to see a big increase in electronification, not only in terms of ticket size but also ticket count,” said Maryanne Richter.

However, electronification is not restricted to fixed-income trading screens.

Lou Rosato, Director, Global Investment Operations, Strategy and Industry Relationships, BlackRock, said focus at the fund titan is on using digital technology to integrate workflows through the full investment lifecycle including post trade and asset servicing. This covers everything from risk to investment ideas to trade and settlement, clearing, reconciliation and reporting – to drive better data symmetry.

“Our fully integrated system allows for this. And, we’re driving connectivity to our core platform with our counterparties along with inter-operability of the platform with our brokers, clients, clearing partners, custodians … the entire ecosystem,” he said.

The aim is to create what he calls ‘ops alpha’ by enhancing the quality and availability of data in real-time for all BlackRock Investment Professionals and Clients worldwide.

“This is improving investment decision-making – with risk management happening upfront and linking though a full life-cycle to finality. There’s opportunity for it to ultimately improve data quality and decision-making and drive alpha from the buy-side’s perspective,” Lou Rosato said.

Blended approach
But technology is not fully replacing humans anytime soon. On the contrary, companies like Symphony, known for their chat-based collaboration platform, are using technology to forge human connections.

“We are trying to give humans leverage sitting in the middle of these complicated flows driven by technology,” said Brad Levy, President and Chief Commercial Officer, Symphony.

Also, digitalization/automated/electronic trading solutions don’t work in isolation. “It is more about a blend of these solutions and a lot of hybrid approaches,” he said.

It is also about blending humans and technology to create liquidity, alpha and workflow efficiencies to better service clients.

For example, Morgan Stanley’s Richter said, “When we have a portfolio trade that comes in via voice from a client, we have the ability to price that portfolio systematically through our algorithm. We also have the ability for humans to come in and augment those prices, depending on size and liquidity. So we are joining our systematic and algorithmic capabilities together with our humans to create more liquidity for our clients.”

The data challenge
Undoubtedly, there are challenges when digitizing.

Brad Levy said data is the biggest challenge, because applications are getting smaller and simpler, while data is getting more complex and even more risky to move around.

Lou Rosato said moving data through the lifecycle is a problem because different parts of the financial system, products, and apps speak different languages.

Bad, uncleansed and unstructured data are also impeding the effective use of ML and AI, pointed out Maryanne Richter.

Nevertheless, none of those would stop the adoption of new technologies.

Morgan Stanley, for instance, is using natural language processing (NLP) in the securitised products space. Symphony is working on products that can transform unstructured data on channels, such as chat or email, into structured and automated information.

Which begs the question, is the increasing use of technology impacting client relationships?

Lou Rosato said it is affording sharper focus on client servicing.

Maryanne Richter concurred: “Having technology to do the heavy-lifting in terms of analyzing data enables you to then pick up the phone and have a really smart conversation. So it is about automating the tedious, low-touch activity to free up time for the more value-added high-touch activity.”