Fixed Income vendors: Ready, Steady, Go!

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29 January 2014
Joséphine de Chazournes
Celent has been following Fintech innovation in the Fixed Income trading space for a few years now. If you didn't know (sic!) please check out the following reports: http://celent.com/reports/innovation-focus-analytics-powering-fixed-income-matching or http://celent.com/reports/technology-european-fixed-income-time-open-pandoras-box and listen to our Webinars, come to our Innovation roundtables, or just ask for a briefing with us ;-) But like most of you, I was starting to have the feeling that I kept hearing or writing (worse!) about the same things and that nothing was really changing in Fixed Income trading. That was until probably the beginning of 4Q13, when we heard some exchanges were starting to make bold moves, some platforms gaining traction with new functionalities (Tradeweb with Sweep) and some specialized vendors expanding globally (Algomi). Then we all spent the latter part of 4Q13 writing business plans, end of year reviews, new year objectives (if not resolutions!), hiring plans, strategy implementation plans, etc. In the meantime however the European Commission, Parliament and Council finally agreed on MiFID II at the last hour, triggering sudden interest in all of the vendors that had been trying to evangelize the market about Fixed Income pre-trade transparency tools, price aggregation and/or distribution, Best execution algorithms and Smart Order Routing (SOR). Think List Group, GATElab, SoftSolutions!, SmartTrade or Axe Trading. The last nail in the coffin of change came in last week when UBS announced it was outsourcing its Fixed Income trading platform to Murex and Ion Trading, two long-established vendors. Here we are talking their institutional voice and electronic trading business, lots of real sales with real traders, not UBS-PIN-FI. This is big news for Fintech. Tier 1 Fixed Income Investment Banks (IBs) historically developed all their technology in-house. Some of them had started since the crisis to integrate small parts of vendor solutions in their in-house systems (e.g. Broadway Technology for GS in Rates), but the outsourcing the entire trading platform: that never used to take place. Think all these personalized valuation models the big fancy trades used to need - that had to be proprietary and developed by a team of in-house quants. UBS is a great first because it obviously has 1) lost more of its shirt in the crisis, 2) publicly made a strategic decision to move its fixed income focus away from the big fancy (and risky) trades and towards less risky and more standard client business (that can have more standard booking, affirmation and valuation systems obviously). It should therefore come as no surprise that they would be the first big IB to make this move. But I don't think this is the last one. Just looking at the 2013 FICC revenues estimates of my Oliver Wyman colleagues made for the 6 big IBs that have reported earnings so far (JPM, BoAML, GS, C, MS, DB), down more than 12% year on year, one can easily see that the pressure on cost will keep sending IBs to the innovative vendors. After Ready and Steady, time to Go for fixed income vendors!

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