Anna Cochetti shares her thoughts about Fixed Income Trade Automation and explains that SoftSolutions has been providing proven solutions in this space for nearly a decade now:
Cash credit fixed income is the last of the FICC flow products to move towards a situation where the majority is traded electronically. Both the buy- and sell-side are responding to this challenge and automation has become a must have rather than a nice to have.
The good news is that this has been a key focus for SoftSolutions for over 10 years. During this time, the team have been continuously developing and tuning automatic execution strategies with clients, building a library of proven rulesets targeted on the Fixed Income markets.
Experience has taught the team that a solution for this market needs to find liquidity and executable pricing levels across multiple venues, in a passive fashion, ensuring the market isn’t alerted to the enquiry pre-trade. That means the right choices need to be made across the board – from the trading infrastructure all the way up to the automation strategies. SoftSolutions have not only achieved this but has a successful track record to prove it with their BestX:FI-A product.
BestX:FI-A not only comes with the ability to integrate and process huge amounts of data but also the logic to interpret that data and build the right execution strategies and, with an active audit, learn to improve the execution quality.
Automated Order Execution has been around for decades and has been well proven in the Equity and FX markets. The way the asset is traded, with liquid and transparent central markets, has enabled now familiar technologies like Smart Order Routing engines and Execution Algorithms to develop and thrive to such an extent that it is becoming increasingly more difficult to participate in these markets without the help of technology.
Yet, when we look at Fixed Income, Automated Order Execution seems to be very much in its infancy. The demands of the asset class are somewhat different to equities, so any automation needs to be built from the ground up with a firm recognition that Fixed Income liquidity presents itself in a different way.
To the question “Why bother automating?”, there seem to be a few variations to the answer but with a common underlying theme, when dealing with large numbers of orders, the more order execution a Fixed Income desk can automate, the more time can be dedicated to filling orders in less liquid bonds:
- So, for an Asset Manager who is tracking indexes, there will be a long list of orders that need to be executed quickly at month end: time is of the essence. Automation can help get through the volume of orders where the importance is getting the complete order book filled.
- For the bigger active funds, it’s not just about finding liquidity; achieving a lower cost of execution is important too, so price discovery across platforms becomes even more relevant even if there is a bit more time to execute.
In both of these cases – there needs to be an order by order decision on what can be automatically executed.
Some firms seem to be relying on the automation offered by the individual Trading Venues. To provide some examples:
Tradeweb offer opportunities to execute orders automatically in a number of ways. It can be as simple as using the “Trade-at-Close” order type; the benefit here is that there is very little in the way of configuration. Tradeweb also have an Automated Intelligent Execution tool (AiEX) which can not only support bonds but also ETFs, Mortgage Backed Securities and Swaps but Tradeweb AiEX will need some configuration.
MarketAxess has a configurable auto execution tool: Auto-X™ provides for low-touch automated execution on their trading platforms. While Bloomberg’s TSOX provides a configurable rules-engine approach to automating order execution.
So, what is the problem with venue specific solutions?
Firstly, there is the missed opportunity to find “Best-Execution” across venues. While most liquidity providers on these venues will say that they provide the same tiered pricing across the MTFs, the cost to trade on each MTF is different.
Secondly, we need to consider how easily other sources of data, like axes, are incorporated into the liquidity discovery process and order execution rules by these venue provided automation engines.
Looking towards a cross-venue solution, an automation engine needs to reside under the control of the user firm – either on premise or in the cloud (private cloud, vendor-cloud or public-cloud).
These deployments are complex, but the good news is that vendors are now looking to simplify the rollout of their solutions, which is especially important for resource strapped buy-side firms.
However, before any automation logic can be built – there needs to be the right trading infrastructure in place.
On the face of it – automation solutions start with much of the same infrastructure that a standard Fixed Income Execution Management System (EMS) needs:
- Compute – The compute power to run the application that helps seek liquidity and to capture and send orders.
- Connectivity to each the trading venues or liquidity providers – The network that connects to trading venues for orders and executions.
- Connectivity to market data services and other data sources – Connectivity to data sources – both public (market data) – and private (tiered pricing and axes) relevant to seeking liquidity and pricing levels.
However, there may be some subtle differences. For example, most of the trading venues offer more than one option for connectivity and that has a bearing on the available business protocols for trading.
Also, while many EMS’s provide access to market data, traders will pull in a number of different structured and unstructured data sources to find liquidity and decide an execution strategy. Automation solutions need to look at a much broader set of data to get closer to the execution success rate of a Trader so it is important that decision engines are able to access broader data sets like historical data, broker rankings, past execution performance of a liquidity provider.
So once all that trading and data infrastructure is in place, the logic to process all this information and make decisions needs to be built.
This is where the real work for firms begin.
While many of the EMS providers out there have integrated rules engines to allow firms to build logic, none come with a complete set of automation rule-sets ready to use. These automation strategies take years to develop and deploy to get any decent auto-execution rates.
BestX:FI-A is different – It is a complete solution. From the trading infrastructure up, the solution has been designed with clear understanding of the challenges of Fixed Income.
Liquidity and price level discovery needs access to the broadest possible sources of data and to be as unnoticed as possible, to protect from unwanted information leakage. That means the right choices need to be made across the board – from the trading infrastructure up to the automation strategies. BestX:FI-A possesses the ability to store, integrate and process huge amounts of data at the point of trade, but also possesses the logic to analyze that data and build the right execution strategies.
For these strategies to reach high automation execution rates, systems need to recognise that market circumstances change and where conditions may be unfavourable at one point in time, they may change later in the day. BestX:FI-A recognises that; based on the instructions in the order, BestX:FI-A will continue to monitor the market to seek execution, if at first look, the market isn’t offering liquidity.
Automating and tuning these strategies has been the focus for SoftSolutions over the past decade and proven in the market by our clients.
So if you are considering trade automation in the Fixed Income markets – come speak to us at SoftSolutions.