With Edoardo Pacenti, Head of Trading Tools for Fixed Income at ION Markets.
In the last decade, the global fixed income markets have been going through a steady process of transformation, with technology playing an ever more important role. Trading is slowly becoming more automated, new venues are proliferating, and both market participants and vendors are coming up with increasingly innovative solutions to address the challenges stemming from trading on illiquid and fragmented markets.
In this Q&A with TradingTech Insight, Edoardo Pacenti, Head of Trading Tools for Fixed Income at ION Markets, shares his insights on how the fixed income technology landscape is evolving.
What are the key trends that you’re seeing in fixed income trading technology? And how is ION responding to those trends?
In the last few years, we’ve seen new markets and new venues offering different types of trading protocols around all-to-all and bilateral trading. We’ve also seen a consolidation in the market with some being acquired by others. So the universe of available platforms for participants, particularly in the US markets, has been changing in the last few years, and not only in terms of protocols and interactions between sell side and buy side, but also in terms of new platforms trying to position themselves as innovators and offering new functionality that should benefit the market.
More innovation is driving more competition, and this is good for the for the buy side to be able to source better prices, but it can also lead to fragmentation, because if more venues are offering different protocols, then it can be more difficult to source liquidity.
Within the ION solution, we provide connectivity to pretty much all the major venues both for execution and also for market data. And we have a fast turnaround in supporting additional markets. One of our strengths is in our speed of onboarding and allowing customers to switch on which venues they want to trade. If a new market enters the space, or if an existing market that we already support offers a new feature, we have the capacity to rapidly add this functionality or this new market to our offering, which means that customers can connect through the ION solution to access all these different liquidity pools through a single screen.
How can fixed income workflow be made more efficient through greater use of automation?
Regulation is always one of the key focuses of automation, you want to be able to tackle regulation in the most seamless and effective way, making sure to tick all the boxes without delaying the trading activity.
We now offer automated sales and trader workflow, so all the voice negotiation that happened before between the sales and the trader can now be fully digitised. As a trader, you can negotiate with your salesperson in the same way as you would via an electronic platform, and then use auto pricing rules, allowing you to serve the customer in an efficient way with no delays.
We have extended this with a compliance engine – a rules engine essentially – that can go through the MiFID II or regulatory checklist. Transitioning from a voice workflow, where you would have to do all of these manual checks while trying to source the price from the trader, to a fully automated workflow that includes the compliance part, is quite powerful.
How is the growing popularity of all-to-all trading platforms impacting the buy side and the sell side? And what are the challenges associated with this model?
All-to-all will clearly drive volumes much higher on trading platforms compared to the standard traditional RFQ. When you trade all-to-all, the universe of products is very wide, and you can receive scattered requests from all-to-all participants looking for price discovery.
What we have within the ION solution is automation of auto negotiation of these all-to-all inquiries. So essentially, you can define rules, so that you prioritise and negotiate enquiries. And because you’re able to filter and to show the traders what they need to see so they can take decisions, you only direct the traders’ attention to the ones that are really important to the business. If it doesn’t need any manual input, you can also negotiate and respond automatically. This will be even more important with the higher volumes due to all-to-all trading.
All-to-all is definitely a good thing for the transparency and competition and sourcing of liquidity for the buy side. And the benefits aren’t only restricted to the buy side, because even the sell side, from an anonymous perspective, through the all-to-all workflow, can also source liquidity from other participants.
But there are challenges for the sell side, particularly around managing these higher volumes efficiently. There is the issue of scalability. Sell side firms don’t want to open the door to a lot of enquiries, and then not have a system that can manage those volumes. Within ION, it’s a standard offering, for both the auto negotiation and from a scalability point of view, to help prioritise the business and show to the trader only the enquiries that the trader needs to take a decision on.
Of course, for easily tradable products, RFQ will probably be still the go-to model for the buy side, because they know that they can source prices on those products from the dealers they have a relationship with. While for less liquid assets, or maybe where they’re just looking for price discovery and trying to see where the market is, the all-to-all model allows them to find liquidity that they would otherwise not get from their traditional set of dealers.
How else can technology can help with sourcing liquidity in illiquid and fragmented markets?
What is really important here is the connectivity, especially for market data, where you don’t have access to tradable prices on things like credit bonds for example. So you might have to rely on different sources of market data, maybe brokers, maybe composite levels. That means you need a solution that can manage the complexity and normalise the different market data sources, so that for a particular product, you can get a full view of what the market data vendors are providing as prices, what the composite levels are, what other real time price data points you have, and consume them all within a single interface.
Different brokers might however provide pricing levels in different ways. It could be composites for off-the-runs in the US Treasury space, but for credit bonds, it could be spread-to-benchmark. So you want to have something that is flexible, that can generate an implied market depth, and that can give you implied analytics on where the price of the bond actually is, based on the different data points across different venues.
If you have availability of data, then you can think more of things that you can do with that data. So for example, we have seen customers very interested in historical interactions between sales and their clients, and whether you can extract opportunities from this unstructured data to offer products to these customers in the future, based on what they’ve done in the past, so you might want to drive analytics off that.
As an additional point, you might be interested in seeing news and analytics on specific products and bonds. And you want to see this at the point of trade. So you might want to be able to select a security and then see in real time, what are multiple providers offering not just in terms of prices, but also analytics on previous interactions, or news on the security, in real time? Is there any particular content that is available, giving a bit more flavour on what is happening with that product? And that all needs to be at the point of decision.
Does desktop integration play a part in that?
It does. And that’s actually another very important topic, not necessarily to tackle fragmented liquidity, but in general. For example, within our fixed income solutions, we have different services for pricing, execution, post trade and analytics, which can all be offered within the same front end, so you can connect to different markets and use all of these services.
As the solution is modular, customers can decide what suits them, take different pieces and decide what they actually want, to fit their needs. On the UI side it’s a similar concept. We have a lot of different innovative services that can offer analytics, not only within ION, but we can also integrate other applications within our front end, so you can communicate between our desktop application and other applications, or use our application as a container to embed other applications within it. As a trader, that gives you a consolidated view, accessing all your important trading applications within one user interface.
The pandemic somewhat accelerated a transition towards this. If traders need to work from home, they want to have a UI that offers as many services as possible in a more ergonomically efficient way.
What role can AI play in fixed income trading?
AI trends in the future will be around predictive business that you can do with customers based on both previous interactions and predictive pricing. You will have the possibility to price products based on historical hit ratio, for example, by looking at current market conditions and previous interactions with customers, to maximise the revenue generated.
The availability of data makes all of these things possible, but then access to that data is key. You need to have the possibility to look back and have a clear view and clear analytics on what all of your previous business interactions were, and then bring in real-time market data on the products. For less liquid products, you want to have as much pricing information as possible. As a salesperson, if you have any axes on a product for example, you want to see this information coming from the trading desk, so that you can offer the same products back to customers. So you need to have this comprehensive view of historical interactions, real time positions from the desk, axes and real time market data.
Where will ION Markets be focusing its energies for the next 12 months or so?
Specifically within analytics, we want to extend our offering to the cloud, managed by ION as an analytics-as-a-service package. This will enable trading desks to have lightweight UI access to the analytics data. It’s something that we’re working on, and it’s quite exciting because the data is available, it’s just a matter of having it available on the cloud. It’s better for the customer if it’s is managed by us, as it gives an overall lower cost of ownership.
And we’re continuing to invest in the UI interoperability space, so we’ll be offering more tools to integrate other front-end applications within our own UI.