Instead of phoning dealers to try to find the best price on a bond, asset managers can send a one-off request to the platform and receive the best quotes back within 45 seconds. It can take a buy-side asset manager five minutes to collect the data from five or six dealers by phone. Some asset managers could try to complete 300 to 400 transactions a day. Saving three minutes on each of these transactions adds up to 900 minutes.
However, according to Keith Wright, chief consultant at SimCorp, this does not resolve all the problems for buy-side asset manager when trading in fixed income. “Asset managers have to sign up to more than one platform to access all the counter-parties they want to trade with. This means their systems have to be compatible with multiple platforms. This hampers attempts by asset managers to implement fully integrated systems,” he says.
Mr Wright says the development of trading platforms means the market is now fragmented electronically rather than manually. But there are attempts to surmount this problem. He cites the Financial Information eXchange (FIX) protocol, a messaging protocol designed to enable real-time electronic communication and the exchange of securities transactions, such as between asset managers and their counter-parties. The FIX protocol covers derivatives, fixed income and foreign exchange.
Guy Eden, solutions director of SunGard, says post-trade communication is fragmented with some asset managers and custodians using faxes, others the telephone and some SWIFT settlement. He points to attempts by Omgeo to provide STP in fixed income for asset managers via its OASYS software. Omgeo says it processes over 100,000 fixed income transactions worth more than $4bn (€3.3bn) a day.
Mr Eden says the slow movement towards automation is partly because asset managers have historically had less incentive to implement STP compared to the sell-side where margins on each trade are very low. He adds that many institutions, particularly in the US, have concentrated on domestic trading but are now increasing their cross-border trading, which requires them to improve their automation mechanisms.
Will Clemens, Advent vice president, STP, says asset managers are seeking improved electronic integration between their in-house order management system and electronic platforms like TradeWeb and Market Axess. “The FIX protocol offers the simplest way for this integration between in-house systems and platforms. By having seamless order flow between the applications, firms can minimise dual entry and increase efficiency by eliminating duplicate processes.”
Despite the development of the FIX protocol, Mr Clemens admits its adoption has been slow for fixed income. This is also in spite of the fact that platforms have enabled asset managers to more easily browse inventory and execute trades electronically.
The costs of not having automation and STP, says Mr Clemens, include the increased chances of errors, devoting time to correcting these errors and a lack of liquidity. “We have seen great progress in manager-to-custodian reconciliation so there is a precedent for the industry attaining STP for discrete functions. With increased attention from the buy-side, sell-side, custody and vendor communities, we will attain greater operating efficiency, lower costs and reduce compliance and trade settlement risk.”
Another potentially significant development has seen SWIFT supporting FIX protocol messages for fixed income transactions on its network. Richard Young, business solutions manager of SWIFT, says there has been particular interest in FIX post trade messaging and SWIFT has several fixed income clients testing these messages now.
“Automation in fixed income has been advanced through the rise of trading platforms. But there are around 70 platforms, most with their own protocols, so it is still a fragmented market,” says Mr Young. “There is also a significant difference between the trading of government and corporate bonds. Around 70 per cent of government bonds are traded electronically compared to 15 to 20 per cent of corporate bonds. For complicated corporate bond transactions, asset managers tend to like talking to dealers by phone. But as trading is increasingly done electronically so asset managers will also focus on automation in the post-trade allocation and confirmation process. Better automation here will help with the creation of the settlement instructions to the custodians using ISO15022 instructions usually carried over SWIFT.”
Asset managers currently send post-trade communications to counter-parties via a variety of mechanisms, says Mr Young, but these are usually outside the trading platforms. “For full STP to be achieved, these need to be more integrated with the platforms and the platforms need to fully support industry protocols for trading and post-trade messaging.”
Peter Khan, head of trading, fixed income at Fidelity International, says the degree of STP varies between geographical markets and the type of fixed income. “STP of trades is the norm for market makers in Europe but it is more advanced across all investor classes in the US market.”
Even though the adoption of STP can reduce back and middle office overheads in the medium term, the problem for asset managers, says Mr Khan, is that significant upfront investment in technology is required. “The basic problem in Europe for STP is a lack of a market consensus in fixed income on the correct FIX protocol to use and, up to this point, a lack of demand from the buy-side community.”
