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  • Sep 30, 2016 | Tradeweb

    Actively improving efficiency on the trading desk

    James Dale, Director, Head of Product Strategy & Implementation at Tradeweb, explains how advances in electronic trading are helping the buy-side.

    Where do trading desks struggle with efficiency in the trade lifecycle?

    Pain points inevitably vary from desk to desk, but some themes are common: the sheer volume of trades to be executed; increasing regulatory scrutiny, squeezed resources; and unpredictable liquidity dynamics. When a passive tracker fund, for example, has to put on more than 500 trades at month-end – whilst also adjusting to shifting patterns of liquidity provision and incoming best execution requirements that demand more detailed documentation – the only logical response is to leverage more electronic trading and automation.

    What are their current approaches to tackling these points of inefficiency?

    We see clients looking to execute an ever-broader range of trades electronically (moving down the liquidity spectrum to products such as bespoke interest rate swaps, repo and convertible bonds) and streamline their workflows in already-automated markets. There’s also a growing bifurcation between low- and high-touch trades, with increased automation allowing traders to focus their expertise on the big-ticket trades where they can add more value. Many firms are looking for solutions that use a more data-driven approach to trade execution, presenting high-quality, easily digestible information that delivers quantifiable improvements in execution performance.

    Where can you see innovative solutions being developed?

    Significant steps have been taken in recent years toward more complete, end-to-end automation of smaller fixed-income trades. List trading first enabled multiple tickets to be executed in parallel and with multiple counterparties, but a new generation of solutions are quickly being implemented that further reduce manual intervention for a wider range of trades.

    The next stage of this is allowing for these typical smaller “low touch” trades a further degree of automation such that auto execution occurs, whereby trades are sent to dealers and executed so long as certain parameters are met (as defined by clients’ best execution requirements), without any manual intervention. This trend contributes to effective resource management by allowing traders to focus on high-touch trades.

    More recently, pre-trade data has become a critical enabler for trading desks – whether by axes from banks, streaming price feeds or historical performance – to tailor their approach, trade-by-trade, across a range of priorities and requirements that can then direct automatic execution. By defining the number of quotes to be sourced, range of liquidity providers to be approached, pricing parameters, and any regulatory requirements, investors can streamline their operational effort in further automating the workflow of these kinds of trades on platforms like ours.

    Moreover, the provision of a broad range of real-time data sources at the point of trade is increasingly a pre-requisite for evidence-based execution, and to fulfil best execution and reporting requirements as both internal and external oversight of the trading process continues to grow.

    What are the challenges to adopting more innovative approaches?

    Market participants across the fixed income industry are faced with all kinds of operational and regulatory challenges – all directly influencing their trade workflows as they seek greater market transparency, execution efficiency, and streamlined processing and reporting. However, they can tackle these burdens by leveraging technology that reduces manual errors, speeds up their ability to discover and digest information, and therefore support a greater focus on higher-touch business efforts.

    For example, buy-side compression trading in interest rate swaps has standardised and automated what was a highly manual and time consuming trading process to offset risk at clearing houses – a result of relatively recent regulation that mandates clearing of derivatives. This has translated into more than $5.5 trillion in notional volume on Tradeweb since we introduced buy-side compression in 2013 – a significant reduction in both line-item exposure and cost for investors.

    As with most technologies, the investment is a loss-leader for many fixed income desks. But in today’s regulatory driven landscape, embracing greater automation to deliver enhanced operational efficiency is essential to supporting their trading businesses. Platforms like Tradeweb aim to help reduce those costs by implementing standardised workflow solutions and investing in innovative functionality that benefits overall market structure, and can be scaled across asset classes.

    However, this evolutionary adoption of electronic trading also increasingly requires greater collaboration and standardisation. This means the systems that manage processes at different stages of the trade lifecycle must be highly interoperable and enable flexibility at the operating level, but also enhance process transparency and visibility – which is beneficial both from a regulatory and exception management perspective.

    How can a firm quantify improvements?

    Clearly, quantification of benefits is integral to the adoption of electronic trading by a buy-side fixed-income trading desk. Almost by default, the extension of electronic trading makes it easier to monitor trading performance due to the data generated on price, volume, counterparties, etc. But, the growing automation of fixed-income trading also increases the scope for firms to utilise transaction cost analysis (TCA) to benchmark broker and trader performance, identify the outliers that can skew trading outcomes, and therefore better direct automated execution. In fixed income, TCA is in its infancy compared to the FX and equity markets, with their vastly larger universe of data points, but there is no shortage of increasingly sophisticated solutions competing to become the market-leader, catering for different trading models and client profiles.

    As with other technology-enabled innovations, the growth of TCA in fixed income will harness both competition and co-operation in the development of innovative solutions that will help buy-side trading desks to add value. Brokers might be drawing in their horns, but that does not mean that buy-side firms have to meet today’s challenges – more regulation, more trades, fewer resources, uncertain liquidity – on their own.

    Not only can this improve execution performance and reduce transaction costs, it can also position firms to meet incoming regulatory obligations. From stricter best execution rules, to new processes for cleared swaps, to increased reporting requirements under MiFID II, increased automation will be imperative in enabling investors to focus their efforts within trading activities and manage their fixed income businesses.

    Originally published in the Q3 2016 issue of The Desk



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