New Year New Tech New Research

In your new year resolutions, did you pledge to understand more the technology that scares you? Or at least the one that some people (aka analysts like me) claim will replace you? If the answer is “No” and you are working in the field of Investment Research, whether producing, consuming or distributing it, then you may want to read our latest report Start Coding Investment Research: How to Implement MiFID II with Robots and AI.

I get paid to write research on fintech so theoretically I am not the tech scared type though I am the first one to control screen time at home. I know we have more and more competition from free research you can all find at your fingertips on the internet, and from cheaper research that leverages outsourced resources crunching a lot of data, but so far we are keeping up probably because our clients think we provide insight that those competitors do not provide yet.

I know however that we have competitors that have technological platforms that distribute their technology in a more user-friendly way with podcasts and fancy databases, that write their research in a more automated way and that you can consume easily because you pull the information with selective search technology that knows what you want and how much you can pay for it.

So before the holiday season, to make sure we were all going to start this new year with the right information in hand, I did look into what artificial intelligence and robotic process automation tools will be doing to research; not exactly my kind of markets fintech research, but more specifically to Investment Research, those written recommendations about equity or bonds or macroeconomic environments to help the buy side make investments.

The result is very honestly scary and exciting at the same time. These new  technologies are maturing at a time of big regulatory change in Europe, MiFID2 is finally kicking in and that means the unbundling of investment research cost from the execution costs the brokers and banks charge their buy side clients. Some buy side will keep using them and be happy to pay that fee, some clearly will start looking at other solutions that will have to propose a different business model provided by banks or by new market players, based on technology.

In our recent report we do look exactly at that: new business models and live case studies that have already been implemented in investment research production, distribution and consumption. Enjoy.

To Brexit and beyond!

So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.

MiFID II on the minds of fixed income leaders

I am getting excited about participating and speaking at the Fixed Income Leaders Summit in Barcelona, Spain this week.  The timing could not be better; the fixed income world is grappling  with the challenges of an evolving market structure, innovation and technology, all within the context of a recently delivered regulatory MiFID II/MiFIR proposal. I am looking forward to hashing out the most pressing challenges facing the market, with the best and brightest leaders from all corners of the fixed income world. In advance of the conference, the European Fixed Income Industry Benchmarking Survey 2015, surveyed 50 senior buy side leaders to get a sense of their focus. The primary challenges  identified, include: the evolving center of gravity in the relationship between the buy side and sell side; digesting and understanding the regulatory framework and MiFID II guidelines: and, engaging with the changing landscape of sourcing data and electronic trading. Celent is very focused on the evolution of the fixed income business within the context of evolving market models, data aggregation/analysis and regulation.  We continue to discuss these topics in our ongoing research. I am especially eager to participate in discussions  around requirements for quoting and new reporting requirements that will impact the buy side. I will also be discussing the evolution of trading tools and electronic trading-looking at the landscape of trading platforms, new analytical tools for accessing liquidity access, and creating a holistic approach with engaging with the market across products. I look forward to catching up on all these topics. Please come by and see my session on market structure and electronic trading tools at 11:45 on Thursday in lovely Barcelona.

MiFID II and you – here before you know it

A brief review indicates that ESMA has given more clarity on its view of fixed income trading in the post-MiFID II world. We are now one step closer to a new world of secondary trading in European bonds. In the context of the heated debate around liquidity in fixed income recently ESMA has moved to an approach that looks at each bond to determine the liquidity thresholds and hence the exact nature of the required pre- and post-trading transparency. ESMA will be looking at 100,000 Euro thresholds with at least two trades occurring daily in at least 80% of trading sessions. Hence, a certain proportion of European bonds will become subject to a wholly new regime of trading-scheduled for January 2017 if there are not additional delays to the start of MiFID II. Bringing a new level of transparency to the pre- and post-trading of fixed income products, in conjunction with the myriad other touch points of MiFID II, will stretch the resources of most financial market participants. While firms have been preparing for some time, there are different degrees of readiness.  For most firms,  the next year will be huge effort, to get ready for this new trading regime.

Post-trade and the clouds over Europe

Europe has been dealing lately with all the issues around the Greek debt and the possibility of a “Grexit”. While the final decision on the matter would have its significant repercussions, the uncertainty that has come with the problem in the last few months is also expected to have its own associated costs. It could also impact the long-term competitiveness of the region vis-à-vis its competitors in the US and Asia-Pacific. When we focus specifically on the capital market issues. there are several significant regulatory changes happening in the European capital markets at this point in time. EMIR, Mifid II, Basel III, T2S and CSDR are all regulations at various stages of implementation. From a post-trade point of view, several of these regulations are expected to have significant impact, especially when we talk about T2S and CSDR. However, the continuing concern over regulatory implementation in Europe is that the delay and uncertainty over when the regulations come into effect could prove costly for the region overall. An example is the delay by European Securities and Markets Authority (ESMA) in providing the draft technical standards. Similarly, the recent decision by Monte Titoli to delay joining the T2S, at least for a few months has proven to be a setback for the project, considering it was easily the largest CSD to participate in the first phase and would have been instrumental in measuring the effectiveness and success of the implementation. There is a lot of ground that the regulators and industry are trying to cover in an economy that is still suffering from the after-shocks of the financial crisis. While trying to do everything in a hurry isn’t the answer, it is important to ensure that the deadlines are kept as much as possible, otherwise on-going delays will directly impact European market’s competitiveness.

Smaller buy side firms and regulation

Increased regulation has become a way of life in the financial markets. Buy side firms are also devoting a lot of time and energy to meeting regulatory requirements. The share of expenditure for regulation and compliance has also risen accordingly. Firms are often building their IT strategies around the various requirements arising from Dodd-Frank, MiFID II, FATCA, Basel III, EMIR and so on. In this environment, smaller buy side firms are possibly in a tougher position than some of their larger asset management and hedge fund counterparts. The reason is that they do not have the same financial and technological capability and hence have to often adopt a more piecemeal approach to regulation and compliance. Their IT systems and platforms are also not geared fully to meet these needs, and streamlining the same is often beyond the capacity of many such small firms. An interesting development that has resulted from the spate of regulations post-financial crisis is the reduced participation or even effective withdrawal of the banks from different types of risk-taking activities. This has been accompanied by the effort by buy side firms to fill some of these needs. While this is an important area of opportunity for buy side firms, it is also something they should be cautious about. The reason is that the increase in buy side activity has to some extent moved the sell side risk to the buy side. This is accompanied by some liquidity problems due to the declining sell side activity. While smaller buy side firms are probably affected less by this issue than some of the largest asset managers, nevertheless they need to ensure their risk management systems are capable of bearing any new and additional stresses that the larger systemic role of the buy side might bring. Celent is currently conducting a lot of research looking at the various requirements of buy side firms, and I am about to publish a report that discusses the specific needs of smaller buy side firms when it comes to regulation. This research would also look at some of the ways in which these firms can cope with their pressing demands, and discusses how it is important for them to stand back and take a more holistic approach to regulation.

Fixed Income vendors: Ready, Steady, Go!

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: or 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!

Singledealer vs. Multidealer platforms in Credit, is that the question?

Summer holidays offer for some of us time to break away from our daily routine, newswires, and analyst reports! For some others it is actually a great time to catch up on what was not read in the past few months. As I am in the first category, I had the pleasure of reading a very interesting piece of research on Credit e-trading as I got back to my computer. This was especially insightful for me as my US colleague, David Easthope, and I follow this topic amongst other themes, and because I am currently updating our yearly European fixed income market sizing report (here is the 2012 sizing report: Fixed Income in Europe: Ready for the Tornado?). What I found most interesting in that report was that it highlighted the fact that, though much innovation is taking place to try to curb the lack of liquidity in secondary corporate bond trading both in Europe and in the US, whether through Order Books (OB) or auctions or hybrid systems, cf also Dave’s recent report: Innovation in Focus: Electronic Trading Platforms in US Corporate Bonds, the general feeling of investors is that the incumbent Request for Quote (RFQ)  Multidealer-to-Client (MD2C) trading platforms will keep their high share of the corporate bond market, and that they are skeptical about Singledealer-to-client (SD2C) platforms. Though I have no doubt that MD2C Bloomberg, Tradeweb and MarketAxess, amongst others, are working on improving their offering to impede the newbies from taking market share away from them, I do think they are going to have to fight hard to stay ahead in Europe in a levelling to tightening corporate bond market (vs. European govies volumes which have seen a staggering growth in 2013 vs. 2012). Why is that? Transparency requirements and Feer of near-Duopoloy. Transparency requirements in Europe will come in corporate bonds through the MiFID review, mentioned in our recent MiFID II Pre- and Post-Trade Transparency: Is There Light at the End of the Three-Year Tunnel? report, which could in the end greatly be influenced by EMIR, i.e. OTC voice trading could very well be banned in liquid corporate bonds. When investors will realize that some  dealers can actually provide them with best execution through smart order routing to RFQ, OB and hybrid systems (cf the 2012 Technology in European Fixed Income: Time to Open Pandora’s Box report), or better, when investors themselves will have invested in such capabilities, I think competition will truly heat up between SD2C and MD2C platforms in the most liquid corporate bonds and/or small size trades (50-100,000Euro trades), not fogerting the retail OB platforms. Feer of near-Duopoly comes from the fact that dealers do not like to leave too much control of their trading activities to one or two entities, hence their currently trying to decide on which new hybrid model to bet (and invest in as a consortium?) for the larger sizes and/or most illiquid bonds, hoping to solve their liquidity issue. Last but not least, I get a lot of inspiration for fixed income in FX. It generally provides me with better inspiration for the rates business which, like FX, tends to have continuous liquidity and be a homogeneous market vs. credit which tends to have episodic liquidity and be a heterogenous market. However, the aggregation theme has become hugely important in FX, between wholesale and institutional platforms, between retails and institutional flow, at SD2C platforms, from technology providers, etc. That part of FX for me shows how SD2C platforms can have an aggregation edge between wholesale and institutional business, between institutional odd-lot and retail trades and between various platforms. Simplistically: think SEF aggregator for corporate bonds. Thinking of the desktop space optmization issue that investors often mentioned, I would like to share two scenarios:
  1. Scenario for the SD2C to keep a slot on the desktop is a combination of extremely modernized chinese walled and balance sheet optimized platform that aggregates, routes and matches as much investor flow as possible (some of it coming from MD2C RFQ platforms, some of it not) but also takes part in a Multidealer (not to client) consortium-like platform for their unmatched inventory and/or for the large size enquiries/indications of interest of their clients? It could be that some clients prefer to have 2-3 really good relationships with 2-3 dealers that have SD2C platforms that serve their particular needs (algos, primary issues, inventory, etc), and use their desktop space for these 2-3 venues rather than having to link up to the many MD2C platforms.
  2. Scenario for the MD2C to keep their currently extremely robust slot in the desktop of investors, before all investors get extremely robust OMS and EMS technology to buypass the MD2C (not soon!) or go for the SD2C-only route, could be to enable wholesale, institutional and retail flows to interact. In CDS indices (which are liquid) we have seen how Tradeweb has gained more than the majority of market share by doing that (and not only): enabling investors to stream wholesale liquidity. Could it be done in corporate bonds? There is currently no interdealerbroker (IDB) e-trading taking place in corporate bonds but could a MD2C platform add that IDB2C functionality? You can read more about IDB2C in The Blurring of the IDB Vs. D2C Models in Fixed Income and FX report. The alternative would be for the MD2C to offer the credit OMS/EMS technology to investors, and some are already working on this.
  More colour to come in September when we publish the 2013 European fixed income sizing report, and in October when we discuss the latest technology vendors we have recently met.

Fixed Income transparency is taking centre stage in Europe

Two weeks ago at the Afme (Association for Financial Markets in Europe) conference in London, Fixed Income finally took centre stage! After years of talking about Equities, ATS then MTF, the rise and fall of hedge funds, high frequency trading and MiFID, maybe a little help from the financial crisis and thereafter (or was it before?) from regulators with MiFID2, Basel3, Solvency2 and the proposed Volcker rule there is finally enough meat on the table to have a full meal, even for our great financial champions. Extremely high quality of speakers, extremely high quality of panels, extremely high quality of attendance, but what struck me most was that we have to watch this space: competition could be heating up… It all started in 2010 when the Cassiopeia Committee, supported by the French ministry of Finance and Economy, sent out an open request for information (why not a request for proposal?) for an electronic institutional European corporate bond trading MTF, together with a set of extremely detailed guidelines on how to do it best according to them, including an all-to-all platform (meaning open to buy and sell-side members), order-book and CCP. Three proposals for new projects were made, one by NyseEuronext, one by MTS, and one by TradingScreen (another one, they realised, already existed for retail, EuroTLX) and there was no winner because this was not a competition. In Italy, when MiFID was transposed by legislative decree into Italian law, the way Fixed Income assets became traded was no different than the way Equities were traded. In fact, now Italian retail liquidity in Fixed Income is fragmented between one exchange (Borsa Italiana), four MTFs (amongst which EuroTLX) and seventeen internalizers. And to guarantee best execution in Fixed Income some Italian brokers route orders to the venue where liquidity and the best price are and enable asset managers to rebalance their portfolios through DMA systems. Of course this is not institutional flow, it is retail (roughly €50k). It probably is impossible to see such a model being extended to institutional sizes. In European Fixed Income historically most institutional trades were done over-the-counter with a bilateral agreement. There was no order-book, no clearing house, not even commissions, banks still today get paid with a piece of the bid-ask spread they quote to the buy-side. How could you expect a Fixed Income trader to price €50k or €20M with the same spread since if they do not get paid a commission proportional to the size of the trade? But transparency is a goal many European asset managers are aiming for and if they already get some pre and/or post-trade data from brokers or electronic platforms such as MarketAxess, or Tradeweb, there is no consolidated tape or TRACE-like data in Europe yet. Hopefully regulators will find a public or private provider for a European Tape, and MiFID2 will impose new and more stringent reporting rules that will not hinder liquidity or reduce trade sizes as some argue. Liquidity is also not comparable between Equities and Fixed Income: there are many more securities (just think of the Nestlé stock just being one and its numerous sister bonds with many different structures, coupons and maturities) and only 3-5% of them are actually liquid. Typically they trade right after the issuance, but then die away, except for unforeseen events such as downgrades. We have seen a lot of these recently in European govies but it has also meant that European corporate bonds’ liquidity has dried up. Will this change with MiFID2? To me the fact that some of the new electronic institutional fixed income platforms have pricings based on commissions and order-books is a clear push towards transparency. It looks like current market players are also preparing for MiFID2. Bloomberg for example, could in time become an OTF with firm prices for the buy-side; Vega-Chi, will be offering not only convertible bonds but also financials and high yield European bonds to the buy-side; UBS PIN-FI, already offers a wholesale platform for the buy-side with firm prices next to its retail odd-lot business. How many more of these projects are in the pipeline? The story does not say however how, post MiFID2, buy or sell-side firms will have to go through the headache of having to decide to which platform they are going to have to link up to guarantee best execution to a pension fund or insurance client, and how to integrate it best with risk management systems, and how much it will cost in terms of resources and money… We all know how much traders like to work on such operational projects, let alone the traders of the asset managers… And… Did I mention that most of these traders do not have an order management system (OMS) or execution management system (EMS) to route liquidity to the best platforms or trading venues? Because, remember, this is not Equity, it’s Fixed Income, traders actually do have to stream liquidity themselves because rarely here do they find firm orders, they’re mostly looking at Requests for Quotes (RFQs) that still have to be negotiated. I think I have a topic for my next research… To be continued!

SEF is the new black

Swap Execution Facilities (SEFs) are the top fashion item of the season and conference sessions including SEFCON II are packed with attendees. What remains to be seen is whether SEF rollouts in 2012 will match the hype. A quick word on the new lexicon: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the European Market Infrastructure Regulation (EMIR), and the Markets in Financial Instruments Directive (MiFID, MiFID II, MiFIR) have introduced several new acronyms to our market lexicon, two of which are SEF and OTF. Swap execution facilities fall under the regulatory purview of the US, while organised trading facilities fall under the purview of European regulators. In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, we examine the emerging SEF/OTF market structure and provide some clarity for those firms engaged in 2012 strategic planning and beyond. We also assess the likely IT impact across the range of market participants and derivatives systems components. A future report will assess where firms are with SEF/OTF rollout and ultimate compliance and what remains to be done. Much will depend on regulatory clarity in 2012 and everything ultimately depends on the volume of trades and liquidity. The swaps market is a product-by-product market and adoption of SEFs/OTFs depends not only on the rules, but also the participant (i.e., small bank vs. large bank, small buy side vs. large buy side, small corporation vs. large corporation). All told, we believe SEFs will be a good force for competition in the market, but overly prescriptive rules or a lack of flexibility could lead to a market structure where nobody wins, including both users and dealers.