Fixed income trading: the pace of technology adoption is speeding up

By Damien Jenner, Managing Director & Fixed Income Product Owner at Horizon Software-

Fixed income trading desks should experience significant transformation in 2019, facing an increasing electronification. The fixed income industry has only recently adopted technological transformation when the equity markets started to use IT platforms decades ago. A vast majority of trading operations are conducted over the phone resulting in a lack of transparency and low efficiencies. Many reasons could explain why the fixed income markets lagged far behind the equities’ one: more complex and non-standardized products including abundance of market data and issuer credit information, and mainly managed by the brokerage side.

 

The combined impact of stricter regulation with MiFID II, low-cost approaches, record low interest rates, greater demand from clients for detailed reporting and continued issuance is bringing new challenges for interest rate traders. Technology is now the solution to provide many of the answers, and what we’ve seen so far in the IT adoption by the bonds market is just the beginning. On the other side IT improvements in electronic trading platforms including improved latency have also pushed toward the increasing automation of the bond markets. Some of our clients estimate than their transaction costs on bond trades can be nearly 10x those of comparable sized equity trades. But beyond automation, transparency and access to more liquidity sources, technology will be a real game changer with a significant shift of the trader’s role.

With advances in machine learning and AI leveraging, technology has also become a must to realize efficiencies and enhance decision-making based on risk and performance analysis. We believe fixed income trading desks are today in an ideal position to benefit from software platforms and drive value for their clients while scaling their businesses, focus on best-execution, strengthen investment strategies and eventually move away from manual and non-automated tasks.

Technology is now becoming critical to assist traders. But what can kind of platform should be chosen?
A proven platform from the equities side appears to be a good choice as a cross-region and multi-asset technology solution will be able to provide a global view on risks and bring real added-value to the full investment spectrum. Also, a strong product heritage around equities and ETFs bring an interesting approach to the design of a disruptive fixed income solution, able to capitalize on a strong experience in equities management.

But what we find the most important at Horizon is probably the openness and flexibility of the solution to facilitate pricing and integrate with third-party and internal tools. An electronic fixed income trading solution needs to talk to a myriad of back-office, risk management and pricing systems. For the pricing, our clients need to customize external pricing and properly manage internally their risk management strategies. They need to easily integrate different interest rate scenarios to price their financial instruments in real-time. A proven flexible algorithmic framework is key to conduct all kind of pricing, risk and hedging simulations in a click.

At Horizon we expect to see more and more interest rate traders embrace superior fixed income technology to gain a competitive advantage and focus more on core added-value tasks.

Whereas real-time pricing and automatic hedging were, until recently, only available to players with internal IT teams and budgets for in-house development, we believe it’s now a perfect timing to launch an algo-oriented and disruptive electronic fixed income solution that could benefit everyone. This solution won’t completely replace human skills but moving forward will enable bond traders to concentrate on managing the market and service their clients more efficiently as technology becomes a source of Alpha.