Corporate bonds: developing the secondary market through electronification

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May 1st, 2015

Corporate bonds have become a popular vehicle of investment in recent years.

  • In the developed world a key driver of growth has been the low interest rate regime persisting in some markets which has made many companies issue new bonds at a relatively low cost of borrowing. Potential for higher returns from these bonds makes them a lucrative proposition for many investors, particularly institutional investors like pension funds and insurance companies.
  • In the emerging markets, buoyed by long term growth opportunities companies have been issuing bonds to raise funds from global and local investors for over a decade now.
    While the activity in the primary market – where sales of new bonds by issuers to investors take place – has been growing steadily, the secondary market – where trading of such bonds take place among different types of investors (and market makers) – has been an issue of concern.
  • Buyers of corporate bonds, particularly those in the emerging markets, typically hold on to them till maturity. This means the pool of securities available for sell in the secondary market is not very deep. The resulting illiquidity means the cost of trading (bid-ask spread) in the secondary market can be substantially high, especially compared to other asset classes like equities or FX.
  • The problem is exacerbated by the lack of standardization among issued bonds. Different corporates issue bonds at different points of time with varying tenors and coupon rates purely based on its specific requirements. Even the bonds issued by the same company at different points of time can have different terms, unlike that seen in case of equities.

These issues limit the choice of investors in the secondary bond market. This gap is typically filled by dealer banks who act as market makers by taking their own positions and buying bonds from sellers or selling them to buyers. However, recent regulations brought in since the crisis of 2008 have made this task of market making very expensive for the dealers banks because of which many of them have significantly reduced their inventories. According to Mark Carney, the governor of the Bank of England, it now takes seven times as long to liquidate bond portfolios compared to what it took in 2008. As some of the central banks consider raising interest rates again, many investors are expected to sell their bonds. If there are too many sellers with only a handful buyers and market makers, that can have serious impact on the already distressed market and the asset class as a whole.

In last few years efforts have been made to develop a viable secondary market by connecting investors and dealers to other investors and dealers through (all-to-all) exchange type electronic trading venues. Here, dealers will not be the central agents; even two investors can connect to each other through the venue to complete a trade. Following other asset classes like equities and FX where electronic trading has already become popular, entry of such platforms in the bond space would be a logical extension. Further electronification of trading is also on the regulators’ agenda as they seek to improve transparency in trading in all asset classes. Trading in bond is still dominated by voice (over the phone) execution method and extent of adoption of electronic trading is relatively limited so far. The structural shifts taking place in this market may finally expedite this process. A number of players have developed or are developing trading platforms; even some of the leading exchanges like the Swiss SIX exchange and the Singapore Exchange are looking to add bond trading platforms. Such trading platforms have the potential to improve price discovery in bond markets and reduce trading costs, boosting investment returns in the sector.

A key challenge in this regard would be to first change not only the mind-set but also the technology and operational practices of the participants in this market. Moving away from a phone based trading desk to electronic tools will require adequate investments and know-how of running the operations. What will ultimately change the nature of the markets substantially are not just electronic trading tools, but a robust best execution rule which requires an interconnected market. As orders start to migrate to electronic platforms and an increasingly interconnected market appears, aggregation and distribution technology will be required to support this evolution. These issues can be handled at the level of trading venues and trading members, and if dealt with adequately should contribute to growing electronification of the market. However, lack of standardisation of issued bonds will still be a challenge and is something that can only be addressed by the issuers, and therefore may take time.

Pushing beyond apps

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Apr 30th, 2015

It struck me while I was driving this morning: First-gen mobile apps are fine, but virtually everyone is missing high-volume opportunities to engage with their customers.

Allow me to back up a step. I was stuck in traffic. Not surprisingly, that gave me some time to ponder my driving experience. I found myself thinking: Why can’t I give my car’s navigation system deep personalizations to help it think the way I do? And how do I get around its singular focus on getting from Point A to Point B?

I explored the system while at a red light. It had jammed me onto yet another “Fastest Route,” disguised as a parking lot. My tweaks to the system didn’t seem to help.

I decided what I’d really like is a Creativity slider so I could tell my nav how far out there to be in determining my route. Suburban side streets, public transportation, going north to eventually head south, and even well-connected parking lots are all nominally on the table when I’m at the helm. So why can’t I tell my nav to think like me?

I’d also like a more personal, periodic verbal update on my likely arrival time, which over the course of my trip this morning went from 38 minutes to almost twice that due to traffic.

The time element is important, of course. But maybe my nav system should sense when I’m agitated (a combination of wearables and telematics would be a strong indicator) and do something to keep me from going off the deep end. Jokes? Soothing music? Directions to highly-rated nearby bakeries? Words of serenity? More configurability is required, obviously, or some really clever automated customization.

Then an even more radical thought struck. Why couldn’t my nav help me navigate not only my trip but my morning as well? “Mr. Weber, you will be in heavy traffic for the next 20 minutes. Shall I read through your unopened emails for you while you wait?” Or, “Your calendar indicates that you have an appointment before your anticipated arrival time. Shall I email the participants to let them know you’re running late?” Or (perhaps if I’m not that agitated), “While you have a few minutes would you like to check your bank balances, or talk to someone about your auto insurance renewal which is due in 10 days?”

What I’m describing here is a level of engagement between me and my mobile devices which is difficult to foster, for both technical and psychological reasons. And it doesn’t work if a nav system is simply a nav system that doesn’t have contextual information about the user. But imagine the benefits if the navigation company, a financial institution, and other consumer-focused firms thought through the consumer experience more holistically. By sensibly injecting themselves into consumers’ daily routines—even when those routines are stressful—companies will have a powerful connection to their customers that will be almost impossible to dislodge. Firms like Google have started down this path, but financial institutions need to push their way into the conversation as well.

Newfound financial freedom: pension reform update – what about the mass affluent?

Apr 30th, 2015

Today I had the pleasure of attending the Wealth Briefing Summit held at the prestigious Guildhall Art Gallery in London.   The event consisted of 3 sessions and was led by a panel of industry experts who conversed about some of the most pertinent topics facing the UK wealth management industry today: pension reform,  digital solutions, and personalized portfolio construction.

While each of these sessions were of interest to me, I found the pension reform “debate” (in quotes as this was much more civilized than the recent PM election debates have been) particularly intriguing. Clearly, one of the solutions to navigating through the new pension rules will be advice from a wealth manager. But, as we know, not everyone wants this advice or can afford this advice. So what are the mass affluent going to do? This was a question raised by an audience member (and a fair one at that). After all, everyone is entitled to a pension and will presumably need some form of guidance in light of the reforms.  I was surprised that not one of the panel members mentioned the idea of automated investment advisors; Nutmeg and insurers (who have created their own automated investment platform) have entered into the pension space.

It’s a good thing we’re here (see our wealth management reports) …anyway, I digress. Perhaps this is an indication that automated investment advisors have barely tapped into the UK wealth management market, or could it be that the panelists’ firms are building their own robo advisor solutions, but are keeping this under wraps for the time being? Or, maybe traditional wealth managers are so out of touch with the mass affluent (we know this to be slightly true), that this question hadn’t occurred to them previously? This is a thought-provoking topic in my opinion, and one that I look to explore further in an upcoming report about the UK retirement market.



Important WM Trends Affecting the Advisor Business

Apr 30th, 2015

We get asked many times what are some of the main trends in the wealth management market, in particular those that disrupt the advisor business. While we can come up with a number of them, here are some of the major ones to consider:

  1. Digitization: Firms need to manage physical and digital channels and integration of disparate channels
  2. Increased investment in advisor tools to increase operational efficiency: Improvement of wealth management platforms and advisor dashboards, collaboration tools, as well as self-directed tools for investors
  3. Simplicity is key to maintaining customer relationships: user experience, content in everyday tools used by advisors, etc.
  4. Integration – What does it mean for advisors to have an integrated experience? What are firms doing today to address this?
  5. Customer segmentation – different strategies employed to retain/cross-sell/up-sell the various customer segments.
  6. Challenges encompassing technology adoption

    These trends are seen across the board in the wealth management industry, although each firm has a different perspective and is engaging them at a different level, in particular because the pain points will be distinct depending on the type of firm and the customer segments targeted. Celent is currently doing a study to identify the differences in these main themes across multiple wealth management firms. If you are a firm with an advisor business and is interested in participating, here is the link:

    Data will be used on an aggregate basis. Participating firms will receive a copy of the study when completed.

Climbing the advice value chain: why the Orion-Jemstep tie-up makes sense

Will Trout

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Apr 24th, 2015

In my last post I talked about the blending of real life and automated advice, and the benefits a hybridized model offer the advisor. Here I discuss the synergies that inform the partnership between portfolio reporting system provider Orion Advisor Services and automated investments advisor Jemstep.

Jemstep has led the automated advice space in recognizing the importance of getting a complete view of the client’s assets, regardless of where they are custodied. This kind of a 360 degree view empowers the advisor, who no longer needs to solicit his client for more assets, but can advise (increasingly often, charge a fee) on those held away.

Orion has won here as well. The ability to offer online account opening and visibility onto held away assets will be immediately accretive to Orion’s more than 500 RIA clients. At the same time, the partnership gives Orion a toehold in the automated advice business. Technology advantages are ephemeral, and this move up the advice value chain will help mitigate the risk of commoditization, a danger that lurks behind even the most cutting edge product or service.


Objects in the mirror are closer than they appear – week 1 musings

Brad Baliey

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Apr 23rd, 2015

I just wanted to send out an inaugural blog post after finishing my first week at Celent. In my previous role, I was a voracious consumer of research across the Capital Markets. I enjoyed Celent’s research, and my interaction with the team. So here I am, ready to go!

I am joining the Securities and Investment practice at a fascinating time: the great meltdown of 2007-09 is in the rear view mirror, but at the same time, it appears in the driver’s side mirror with the warning OBJECTS IN THE MIRROR ARE CLOSER THAN THEY APPEAR. The FS vertical continues to digest the legal, regulatory, operational, liquidity, capital, and technological implications; the shock waves, though dampened, still resonate.

From the vantage point of my twenty years in the front-office, technology has been the nexus – an enabler of human imagination and market structure change. However, the convergence of good regulation, deep understanding of market-micro structure, balancing competing incentives, and desire to go beyond the status-quo (if necessary) is always the solution to an effective marketplace.

Looking back is fun, educational, and tells a story (albeit a different story to different constituents). The challenge, of course, is the future. We want to look forward – where are the Capital Markets going. Which technology? Which systems? Which regulation? Which market structure?

To that end, referencing a piece that appeared earlier this week in the WSJ Behind Ginni Rometty’s Plan to Reboot IBM. IBM has been strategically reinventing itself, shedding underperforming low margin businesses and aggressively growing into the future. The direction of Big Blue in many ways sets the agenda for a technology advisory in FS: Artificial Intelligence, Cloud Services, Apps, Cyber-Security and Personalized Platforms.

These are top-of-mind in in the Capital Markets-across all asset classes. I look forward to working together to identify, explore, define, and help explain these trends.

Please reach out to me with questions or comments at

Follow me on twitter @bradjaybailey

Please join my Market Structure LinkedIn Group


A secret weapon for scaling the advisory practice

Will Trout

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Apr 23rd, 2015

It seems like independent advisors at RIAs and other providers of wealth management counsel are slowly shedding their heretofore simplistic views (i.e. either you’re a robot or you’re real life) around automated investing, and considering the opportunities the that automation can offer them.

Automated investments platforms empower the real life advisor by allowing her to spend more time on her most valuable clients, while also reaching out to underserved prospects and clients. These could be high potential Millennials, retirees in the de-accumulation phase, wealthy people unwilling to put more than a limited share of their eggs in one basket, or the mass affluent generally. Simply put, automation is a secret weapon for scaling the practice.

Until this year, automated and real life investment advice lived on separate planets that only occasionally collided. The recently announced partnership between portfolio reporting system provider Orion and automated advisor Jemstep, coming in the wake of the acquisition of Upside Advisor by Envestnet, is proof put that these worlds are converging.

I’ll go into the details of the deal in my next post. Suffice it to note for now that automation already spans the wealth management enterprise platform, from back office document sharing to account opening on the front end. Why shouldn’t it support the advisor?

Are Traditional Providers Finally Taking the Robos Seriously?

Will Trout

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Apr 22nd, 2015

A recent article in the trade press about RIAs creating (and even seeking to white label) their own “robo” platforms underscored concerns I’ve had about around the automated investments business for some time.

I see three major headwinds facing the automated advisors, particularly those primarily serving investors directly (my editorial commentary in italics).

  • Costs of customer acquisition are high. At what point are the venture capital backers going to want their more half billion dollars back?
  • Revenue models are low. It’s hard to make money when you are charging less than 25 bps on assets.
  • Barriers to entry are few. Combine the ability to code and decent investments savvy and you have got the skeleton of a robo. Then it’s off the see the deep pocketed panjandrums of Silicon Valley.

I’ve said before that consolidation is around the corner, be that from a market correction or escalating pressure on fees. In the meantime, it would not surprise me at all to see one of the larger automated advisors seek to cash out and sell to a wirehouse or major custodian.

Granted, a buyer might find the price tag hard to stomach, but for the first mover, strategic concerns may trump financial. To the bold go the spoils, and the traditional high cost advisor based model is becoming increasingly unsustainable. The desire to efficiently serve a less affluent market is one reason Charles Schwab built its Intelligent Portfolios platform. Why wouldn’t a broker/custodian take a cue from Schwab and buy a high profile robo that it can plug directly into its advisor network?

Twilight of the ETF? Why Direct Indexing matters

Will Trout

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Apr 10th, 2015

Wealthfront launched its Direct Indexing Platform for retail investors with some fanfare back in 2013. For those unfamiliar with the concept, direct indexing allows the investor to replicate the performance of the broader market while capturing the tax advantages of owning individual securities. These advantages can be considerable: the Silicon Valley firm estimates that on its flagship Wealthfront 1000 product (which blends up to 1000 stocks from the S&P 1500® with a small cap ETF) it can generate more than 2% in additional returns in tax savings per year. With investor entrance requirements at a million dollars, that’s a lot of dough.

Wealthfront describes its indexing platform (soon to be available in modified form for as little as $100,000) as taking “passive investing to a whole new level.” A bold claim, perhaps, but one that does not seem unfounded. Over the last decade, the ETF has taken market share from the more expensive and less wieldy mutual fund. Why wouldn’t the hyper tax efficient direct indexing method gain purchase at the expense of the ETF, particularly as costs to the investor trend lower?

Time will tell, but it’s worth noting that Wealthfront isn’t the only firm that wants to outindex Vanguard and other professional indexers. Competition is coming from an unexpected place: Cambridge, MA based Smartleaf, Inc. The provider of tax overlay software to bank trust departments and RIAs is making a quiet pivot towards the asset management business.

The new entity known as Smartleaf Asset Management wants to use its proprietary rebalancing technology to solve what CEO Jerry Michael calls the “optics problem” of paying an advisor to run a low cost passive strategy. Michael says his technology will help him stand out in two ways. First, he can customize portfolios to the social investing or other preferences of the investor. Second, he can transition existing investor holdings directly into the new indexed portfolio, an appealing feature for investors holding low basis stock.

Unlike Wealthfront, Smartleaf will not be marketing to the consumer directly, but rather serving as a sub advisor to retail brokers and other distributors. This doesn’t mean Smartleaf and Wealthfront won’t eventually meet on the playing field. Michael says investors will be able to access what he calls his Indexing 2.0 platform for as little as $50,000, since he deploys a portfolio limited to 35 or 70 stocks. While the platform isn’t yet live, it is slated to appear on a major online brokerage platform by the end of the month.

Disruption is an overused word, and the big trends don’t come around that often. I believe we are seeing such a trend in the form of Direct Indexing, with implications for the ETF and the firms behind them. Expect the doors to open to all levels of investors as more and more firms jump on the Direct Indexing bandwagon.


IT spending webinar April 30th

David Easthope

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Apr 9th, 2015

Please join members of the Celent Securities and Investments team as we discuss how firms in the Securities and Investments industry need to review and alter business and technology strategies with a long-term vision in mind, moving beyond short-term measures to address immediate needs.

This webinar is based on a recently published report.


Register here