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20 November 2014Joséphine de Chazournes
Time keeps becoming scarcer and we all become more selective on what conference we will attend or speak at. But yesterday, as I was by chance in Paris, I dropped by one of the potentially nth conference on fixed income, and was presently surprised by the value of its content. Congrats to Trading Screen for pulling it off. Let me share with you a few takeaways, mainly from a great buy side panel: 1) One of the buy sides (whom we all know are the ones calling the shots nowadays) summarized his selection process for choosing a new trading platform as follows: i) Who owns the platform? A bank (negative points) or a vendor (positive points if strong balance sheet). I would add exchanges (they are neutral) and interdealer brokers (for whom it is one of the only options to remain in business) to that list, but the latter will have a challenge at connecting all the buy side. I have an open question here: why wouldn't the big buy side invest together in a platform they believe in with Equity so that they can reap the benefits of the success they will bring to it as the banks did with Tradeweb?Aren't they in the business of investing? ii) Buy side is not an option: if the buy side doesn't all connect together in an automated way, the success rate of the platform will be low. (c.f. who's calling the shots). iii) The need for an independent clearing agent from ownership and/or for the functionality to choose one's own clearing agent. Here I actually pushed the question further as a big custodian is currently rumored to be the clearing agent of a MD2C platform's new product: should custodians be involved, should they become agent brokers since they have the assets of the AMs (and a clean balance sheet, may I add?), or be a platform? Some people in the audience laughed at that one, pretty sad considering what some of the big global custodians have in pipe, let's assume these were brokers who have never taken the time to understand what happens "post" trade... thankfully at least two of the big buy sides in the panel actually got my point: there could be room for some innovative matching engine to team up with custodians (Algomi?). See last year's Celent report: Innovation in Focus: The Analytics Powering Fixed Income Matching for a comparison of the functionalities of the new matching vendors. iv) Flexibility of interactivity: the buy side has to be able to choose to interact only with each other, to exclude toxic flow, to include some banks, etc. Everyday potentially in different ways. So just a switch functionality for the other side of the trade. Some new platforms thankfully already have that in their rule book/functionalities such as Bondcube or TradeCross (Trading Screen's 2.0 version of Galaxy). In our report we actually had mentioned the "selective multicast" capability of Baymarkets for banks to select what prices to send to what client in cascades; this is an interesting adaptation for the buy side to select who to send what interest or order or request for quote to whom in cascade or not. 2) Another point that was made was that there is no first mover advantage, this is taking time to pick up as AMs are adapting to change and regulations on transparency is not final: I could not agree more as we have been having these discussions for the past 3-4 years non-stop, and the number of professionals buy and sell side interested keeps increasing. Still, at some point the big AMs will have to jump on one ship as the cost of illiquidity is becoming too expensive for their funds' performance (nice presentation on that from an AM quant). 3) Last but not least is the cost of connectivity to all of these platforms, apart from the time spent to connect to them (and to convince senior management to connect to them?). This has to be corroborated also by the lack of screen space available for new entrants, the need to come in via other or incumbent screens maybe? Or via a web browser? 4) Last interesting point which is an idea we have been pushing out at Celent for a while: the buy-side could go directly to the issuers: yes, and they already do actually, for big infrastructure projects or issues whereby they already have a relationship with the issue. A platform with both and no brokers, banks to build the book and syndicate and sustain the price? CSDs and iCSDs have a role to play here: such a platform could work with Dutch auctions or even normal auction process, but it would work more in the interest of the smaller buy side than the big ones obviously, creating a level playing field... hence hard to make it pick up... SMEs and small institutions could meet on P2P lending platforms through aggregators of interest such as Orchard though. More in an upcoming report on these... As for TradeCross, I still need to get a demo but we already know that it will be All-to-All (but in the flexible way mentioned above, not our old definition with CLOB and level playing field), anonymous, an MTF, trading with all-in price (commission), interest and orders, multiple trading models (did they mean protocols?), spread or price or yield trading and with a web browser if need be. No go live date as of yet.