Masters of the Universe adjust to the new reality as tech hits government bonds
Technology is creeping towards the bond trading desks of large investment banks. Government bond traders may have been the Masters of the Universe in the 1980s, but they're going to have to accept that life is about to get tougher.
“The rise of electronic trading has reduced the number of traders working on a trading desk, so there are less people who have to do more,” said Vladimir Danishevsky, senior group manager and the head of corporate bonds flow electronic trading IT at Citi, formerly with Barclays and Credit Suisse. “Traders don’t have a choice – they need to apply this to their execution and their pricing on some trades which are not their primary interest or not for their primary customers to find a smart price that allows them to use most of their balance sheet for certain customers in the best possible way.
Banks are spending more. Greenwich Associates' reported on fixed income trading released yesterday revealed that the nation's top six government bond dealers are spending nearly $25bn on technology this year.
Bond traders are going to struggle to adapt, according to a panel of e-trading experts at the The Trading Show New York this week. The main drivers of change include regulations, higher capital requirements for banks, illiquidity, technological innovation and increasing institutional investor appetite for data-driven insights.
What does the rise of electronic trading mean for bond traders and their career prospects? Fewer traders on a particular desk saddled with more responsibilities.
“Most of the providers of liquidity are not interested in providing it to all sources, just their preferred customers – sell-side executions try to give preferential pricing to their golden customers, not the whole world,” said Danishevsky.
Firms are focusing on data analytics, transaction cost analysis (TCA) and best execution as they try to capitalize on newly available order-book and market data to enhance their operational efficiency and lower costs. But they still need humans working in those functions, even as technology begins to shoulder more of the load.
“Best execution is still between two individuals, one person talking to another person, and I don’t see how some of these [automation] practices trying to be put in place are going to improve the situation,” said Maxime Seguineau, a managing director and the head of algorithmic fixed income trading at Seaport Global Securities. “It’s hard in the credit markets especially to provide best execution not knowing what data is real and what data is not.”
“Electronic trading represents maybe 15-to-20% tops of the $700bn of bonds traded daily, so we’re not looking at a market structure that will mirror equities anytime soon, which is not to say that there won’t be opportunities, but you have to think about liquidity and the infrastructure required to get there.
Humans are still in charge of making requests for quotations (RFQs) or invitations for bids (IFBs).
“A workflow for corporate credit trading is primary RFQ-driven, which is legacy based on habits,” Seguineau said. “Even younger generations of traders follow that process, and firms are going to use an RFQ-based protocol regardless of trade size.
However, there are job opportunities in electronic trading technology infrastructure teams.
“The buy-side firms don’t even have enough expertise to build the systems,” Danishevsky said. “They’re mostly just using a Bloomberg Terminal and a MarketAxess Terminal, because they don’t have the expertise to get together and build something for all-to-all.”
The new electronic platforms enabling all-to-all trading are gradually starting to gain traction, but they are not a panacea for bond-market illiquidity.
“Banks are looking to all areas of technology to make things more efficient and moving forward, and it is becoming a bigger part of the marketplace, so if all-to-all provides some sort of liquidity to the market or another benefit, then it’ll be a success,” said Tom Bumbolow, a former executive director of credit sales at J.P. Morgan, where he worked for 19 years before leaving in March. “My concern is all-to-all only works if the clients are willing to put their balance sheets behind it, and I’m worried about the balance between buyers and sellers getting out of whack.”
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