Managing the bond issuance process manually is often inefficient and creates operational risk for buy-side traders.
This video is the first in a three-part series with Herb Werth, managing director at IHS Markit, discussing how his firm supports traders in automating this process.
Dan Barnes Welcome to Trader TV, talking with IHS Market about optimizing the trading process for primary markets. I’m Dan Barnes and with me today is Herb Werth of IHS Market. Herb, welcome to Trader TV.
Herb Werth Thank you, Dan, delighted to be here.
Dan Barnes Herb, what are the problems traders encounter in the primary markets?
Herb Werth Well, the primary market process is effectively one of information dissemination and price discovery. Traders need to be very careful not to miss the information in that process.
Dan Barnes Thank you very much. What sort of messages are they facing and managing?
Herb Werth Well, as the deal starts, the first thing that happens is a syndicate bank announces to the market that the information is available and the deal has been announced. And so the trader receives that information, interprets it and forwards it on to his investment team to evaluate the deal.
Dan Barnes And how is that flow of information difficult to manage for a trader?
Herb Werth Well, the trader is the conduit for information into their firm. And so in receiving that announcement message, the trader will pass it on to the portfolio managers and analysts at the firm, who in turn will respond with interest in the deal. The trader then needs to take that information and pass it back to the syndicate bank, so that they can indicate their interest in that particular issue.
Dan Barnes What sort of information is being conveyed in this process?
Herb Werth Well, it starts with the deal announcement, which includes the terms and conditions of the deal, and it moves on to things like price guidance, a launch level on the deal, it can also include the allocation information and, of course, the final pricing. And coming back from the investment team are reactions to that information.
Dan Barnes So you see the number of messages starting to grow. What other factors impact the workload for the trader?
Herb Werth Well, on a corporate bond deal fx, it’s usually syndicated by multiple banks, and so you could have four banks sending the exact same information through the back trader, and the trader needing to echo their interest back to those banks. So, the number of messages can grow pretty significantly.
Dan Barnes That’s a pretty big task for traders to manage?
Herb Werth It is. And it gets worse because it could be multiple deals in the market on a given day. It’s not uncommon to see up to 15 deals in the corporate bond market on a busy issuance day.
Dan Barnes So, at that point, you could be seeing 465 messages internally, and 660 externally, and they’re being managed by the trader manually.
Dan Barnes Yeah, it adds up pretty quickly, and it’s big burden to put on a single person in an organization.
Dan Barnes So, I can see why primary markets is such a massive task for traders to manage.
Herb Werth It is, and it’s only one part of their job. Secondary market trading, risk management, transaction cost analysis are all things that traders need to worry about while doing this other task.
Dan Barnes So Herb, you have a solution to this problem? You just make the messages go away?
Herb Werth Not at all. We make the process of receiving and consuming that information more efficient.
Dan Barnes So what are we looking at here?
Herb Werth Well, this is our live deal monitor, and our deal monitor takes information that sent directly from the syndicate banks to investors and organizes it in a way that traders, portfolio managers and analysts can make sense of the new issue market. The deals on the screen are the deals that are active in the market, and if a portfolio manager or a trader wants to go in and see that more information about that deal, they’re able to click in and view all the details about it.
Dan Barnes What sort of information is available to them and what can they do with that?
Herb Werth Well, all the information that’s available on that deal at that point in time is displayed on the deal detail screen. It includes the messages sent by the banks and includes all the terms and conditions of the deal in an easy-to-read format. It also includes any deal documents that the banks have sent, along with the deal, and any internal commentary that they’d like to make on that deal.
Dan Barnes So there’s the internal messaging, but of course, if they want to participate in the deal, they have to then engage with the market. So how do you assist with that?
Herb Werth So, investor access passes orders electronically, directly into the syndicate order book, at the active of book for that deal. And so our order form allows the trader to quickly see some of the details of the deal, enter their orders and pass that to banks who will manage those orders in the new issue process.
Dan Barnes And so once they’ve submitted the order, what do they do next?
Herb Werth Well, first and foremost, they can see that their order was delivered to the syndicate order book directly on our screen. They can monitor any deal updates that happened over the life cycle of that deal. And when their allocations are available, it’s delivered directly over the platform. They can see that in realtime.
Dan Barnes So, the deal doesn’t end with the allocation. How does all that information then make its way into the books of the asset manager?
Herb Werth So, the last step of the deal is that it prices, so the price of the bond, as well as all the information necessary to clear and settle the trade, is communicated over the platform. At that point, a final trade report can be exported and pushed downstream into any systems for trade booking.
Dan Barnes I can see how that increases efficiency, but manual processing also creates operational risk. How are you managing that?
Herb Werth Operational risk is a risk that’s assumed by having a bad process. This platform allows investors to improve their process for investing in new issues and therefore managing operational risk.
Herb Werth That’s great. Herb, thank you very much.
Dan Barnes Thank you, Dan.
Herb Werth In our next video, we’ll be taking a deeper dive into the operational risk that can exist between the portfolio manager and the trader. And then we’ll look at the ways we can mitigate that risk.
