" class="no-js "lang="en-US"> Advanced Tech will be Essential to Fixed Income Trading in a Post-MiFID II Marketplace, Study Reveals - Fintech Finance
Monday, April 22, 2024

Advanced Tech will be Essential to Fixed Income Trading in a Post-MiFID II Marketplace, Study Reveals

Liquidnet, the global institutional trading network, today published the results of a recent survey of global asset management firms that explores how MiFID II impacts the role of technology in trading corporate bonds. According to the study, titled ‘Future Tech—Trading Bonds Post MiFID II’, 86% of respondent firms had technology in place to comply with the MiFID II European regulation implementation date. This is still a work in progress, however, with 86% of firms currently in the process of re-configuring workflows and 68% improving data collection.

“Historically, some European fixed income portfolio managers were seen as slow to appreciate the role bond dealing desks can play in implementing investment strategies and generating alpha,” said Rebecca Healey, Head of EMEA Market Structure for Liquidnet and author of the report. “Firms are now beginning to recognise the central role technology plays in making workflows more efficient, allowing trading desks to better evaluate the true cost of execution and not solely focusing on the lowest price possible as that is not necessarily ‘best execution.’ This will ultimately help portfolio managers to build more resilient strategies that take liquidity conditions into account at the point of investment selection, not just execution.”

Because fixed income has, until recently, underinvested in trading technology compared to equity markets, bond trading desks now find themselves at the forefront of this next step-change of systems that are capable of effectively managing aggregated liquidity sources. However, the overarching requirement for future fixed income technology will not be to replace existing technology, but to implement a flexible architecture capable of integrating with legacy technology as well as with future specialist innovation across the asset classes.

It is not only technological change that firms are addressing, but also behavourial change across organisations. Dealing desks now need to source liquidity from multiple locations as well as understand the optimal point of entry or exit of a trade—even utilising an alternative risk/reward bridge investment while waiting for improved liquidity sources to emerge.

Other key highlights from the research include:

  • Over three-quarters of respondents are planning to upgrade their technology solutions in 2018, in various ways; 50% of respondents are implementing an EMS; 43% are upgrading their order management systems (OMS), and 10% are switching OMS providers.
  • Of those looking to install an EMS, 94% are choosing to do so to manage liquidity. However, the size of the firm plays a factor given the cost of implementation. 57% of small firms are not investing in an EMS at this stage, versus 64% of large firms who are investing.
  • 76% of respondents are focusing on the need for standardised connectivity throughout their workflows, as legacy technology makes the fluid flow of accurate data challenging.

In order for PMs and traders to leverage opportunities as they arise and meet regulatory obligations, firms must not only embrace technological change, but also instigate behavioural change across their organisations. Liquidnet foresees an extension of the role dealing desks play in implementing investment strategies from merely executing a PM’s instructions to a true execution partnership, while still ensuring separate trading functions to avoid any perceived conflict between execution and advice. To achieve this, technology tools will be required in order to give greater control to the buy-side trader over the execution process.

Basically, what the survey points to is that the main requirement for the corporate bond trading desk of the future is the ability to combine order management, data aggregation, and access to electronic liquidity with the overarching goal of empowering the trading desk to deliver more alpha,” concluded Constantinos Antoniades, Liquidnet’s Global Head of Fixed Income.

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