April 23, 2024

By Ravi Sawhney, Head of Fixed Income Currency and Commodities Trade Automation, Bloomberg LP.

Electronic trading in fixed income has been on the rise for the last decade. A report in to the state of the U.S. Treasury Market by Greenwich Associates Sizing and Segmenting Trading in the U.S. Treasury Market – Q4 2017 reports that 69% of the $487 Billion traded daily is through electronic platforms. Even in the less liquid corporate bond market, Greenwich in Technology Transforming a Vast Corporate Bond Market – Q4 2017 reports that 84% of investors are now using electronic trading for a proportion of their eligible order flow.

As trading moves from voice to digitized channels, it opens up the opportunity for execution desks and traders to benefit from technology that can automate parts of the trade execution workflow – or the entire process.

Trade automation products can help execution traders boost their productivity, increasing the number of orders they can manage during the daily trading window. It also enables the desk to break down their incoming order flow from their portfolio managers into discrete ‘high touch’ and ‘low touch’ functions.

Low touch orders would typically be those in liquid benchmark products for under round-lot sizes in notional, for example on-the-run USTs. Conversely, High touch orders would be those of larger size in difficult to find names, for example a high yield corporate where the PM wants to discretely trade in block size. These are the types of orders where an execution trader can excel and really earn their bonus through generating execution alpha.

Rather than seeing automation as a threat, forward thinking traders are embracing it as a way to augment their capabilities, raising their efficiency and profitability for their firm.

Fixed income: Automating the future

Best practice, every trade

From a regulatory and compliance point of view, automation delivers a significant advantage: ensuring the firm’s best execution policy is always applied, no exceptions. Most asset managers, especially post MiFID II, have a best execution policy committee that gathers periodically to review the quality of execution delivered by the trading desks. These meetings may result in modifications to the policy that can be expressed as rules and fed into the automation technology. Adopting best execution this way removes the chance of human bias or even outright error creeping into the system.

What makes a good trade automation tool?

The best trade automation technologies offer a true multi-asset experience while respecting the nuances of each market they operate in. For example, automation for an equities order may be expressed as percentage of average daily volume and allow the client to auto route any matching orders to specific brokers and strategies they have access to manually.

In fixed income, a full zero-touch automation rule would need to provide a framework that allows a trader to express the complex logic that goes into how they would select dealers on a multi-dealer request for quote. The criteria would need to account for real-time dealer prices, axes and historical performance metrics. The system would additionally need to allow the trader to codify their best execution logic so it knows under what conditions it should lift a quote.

A trend you can’t ignore

There is a huge risk in simply ignoring the automation trend as firms that do that face the danger of becoming uncompetitive. Those that embrace automation need to commit time to creating rules that match their trading styles.

Many traders, especially in equities, are realizing they can save time and money by using automated trading tools to do in minutes work that could otherwise have taken hours. Fixed income and FX are relatively newer to this game but catching up fast.

As adoption widens and comfort levels grow so will the demands for increased levels of sophistication in trade automation tools. As the envelope is pushed, orders that were once considered ‘high touch’ will end up being routed to ‘low touch’ machinery. Data science, artificial intelligence and machine learning will unquestionably further drive innovation as novel approaches enable more cognitive models to be developed with data being generated on execution desks.

Execution traders, if they are not already, should support automation and be part of the narrative shaping the technology for the future. Their roles will change but I believe for the better.


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