Electronic repo trading has moved to the next level

Published on 14 March 2022

The enhanced functionality available through new electronic repo trading tools enables far greater management of the trading and pricing workflow. As pure voice trading becomes an outlier to the combined e-trading and voice model, demand for electronic solutions are driving the expansion by instrument, geography and user demographic.

Kat Dawson of MTS and Iain Colquhoun of TD Securities say that partnerships between dealers and repo platforms can help to bridge gaps in the market and ensure that sell-side firms are able to better manage their role as liquidity intermediary.

Dan Barnes: Welcome to Trader TV – your insights into trading for professional investors. I’m Dan Barnes.

Electronic repo trading between dealers and clients has evolved to deliver fundamentally better service for investors. To tell me how banks and investment firms are taking advantage of this are Kat Dawson of MTS and Iain Colquhoun of TD Securities.

Kat, Iain, welcome to the show.

Kat Dawson: Thanks very much, Dan.

Iain Colquhoun: Nice to be here, Dan

Dan Barnes: Ian, to start with, can you tell me what have been the key drivers for the electronification of repo trading?

Iain Colquhoun: The repo market historically has been very anachronistic. It lagged behind most peer products on the trading floor in terms of automation. That’s changed fundamentally I’ll say over the past three or four years, and we’ve started to see increasing levels of automation.

At it’s very basic level that might involve just a Bloomberg ticket. The drive to go past that has come very much from the regulatory side, the development SFTR has been key in this, and really, the fact that the electronic record of the trade can include all of the necessary regulatory information and ETI, the LEI, the firm involved; it provides all the information possible in a very user friendly format, and those regulations continue to adopt to to SFTR coming in. That kind of settled the process and it becomes a great deal more important, and it’s not just about saving money or saving time anymore, it’s about complying with regulation.

The Repo market still starts with the conversation. It’s very much an over-the-counter product. It will be a negotiation between two counterparts, but that confirmation stage and that final part of the process, where a list of perhaps very many bonds or several different terms of maturity when it comes to tri-party could be put on screen and priced very precisely now. That’s something that really has taken the market forward.

Kat Dawson: What we’ve noticed, particularly at MTS, has been that historically it was just a few key clients coming to us for help in automating this flow. And actually, more recently, it’s been dealers coming to us where they have the old client that’s still trading purely voice and they are seeming like a bit of an outlier. We’ve got a very extensive and established network of clients on our BondVision Trading Venue, in which we’re able to connect them with to bring those two counterparties together.

What we’d want to do at MTS is to be able to support and complement the relationships that the sell-side have with their clients and not disintermediate that in any way. We’ve always had a very strong pan-European presence. And actually, in more recent years, we’ve really expanded in terms of pushing more towards UK hedge funds and UK-based asset managers. We’ve managed to onboard quite a lot of those in the last two years.

A key change has actually been around the issues that we’re trading as well. So we’ve been very much known and renowned for trading a lot of European repo. The need to dealer repo market, our average daily volumes recently has been around 140 billion, it was absolutely huge, and it’s been quite interesting to see client demand in the dealer to client space. We’ve been trading a lot more tri-party repo, in either Sterling or US dollars. Traditionally, things that people perhaps wouldn’t necessarily associate with MTS. So it’s been a bit of a new venture for us, but it’s been really, really great to see and we hope to better continue in that vein as well.

Dan Barnes: Iain, when we look at the service level clients are receiving. How does that reflect the evolution we’re seeing in electronic trading of repo?

Iain Colquhoun: Relationships are still incredibly important, and what we want to be doing is talking to our clients about the direction of the market, what their plans are for the next six months. What we do want to be talking about is settlement fills, or what Eisen was it that you wanted to transact in there? Or what was the end date, the 4th of March or the 3rd of March? I think that development of electronic trading has really added a degree of certainty to the end of the process, which really allows us to concentrate on the real meat of the relationship and really try to add value to our clients.

Sales have almost reduced to zero and as we add on layers of STP, it becomes very hard for the trade to go wrong. In the olden days, perhaps we would have seen the advent of electronic trading as being the end of the kind of formal bank sales department, but, if anything, we’re seeing the opposite of that. The sales part of the relationship becomes more important. A repo salesperson is no longer an admin person who’s handholding the operational process. What they’re doing is enhancing the relationship properly as the name of the role would suggest. So that electronic element has really enhanced all parts of the relationship.

Dan Barnes: That’s really good. Thank you. So if we think about developing best practices in the electronic trading of repo, what would you say are some of the key points?

Kat Dawson: Primarily, we were focused on efficiency, and simplicity was key for us in this process. So with our existing inter-dealer platform, which has over 100 dealers connected, we just thought it made sense to make that connection as easy as possible for dealers by building functionality for the dealer-to-client platform from the existing inter-dealer technology. So we’ve done that for all of our banks, and we’re also able to facilitate their trading, whether it’s via their own frontend or via their specific ISV, it’s crucial on the sell-side.

I think it’s also important to mention on the buy-side we have a seamless, multiproduct platform for all buy-side clients, where they can open an RFQ built on any rates product, corporate product or any repo trading as well, all from the same frontend. Also, we’ve added an axe functionality on BondVision repo, which allows the trader on the sell-side to reflect an axe from the inter-dealer order book that they’re currently sending on MTS repo. And you can show an indicative size or you can do an indicative rate and size, but all of the data is controlled and owned by that trader, so you can show as much or as little information as he likes with his client. But effectively it means that the clients are getting tailormade or tiered access essentially from the trader.

Iain Colquhoun: We come from a background where things are incredibly siloed, so we have UK guid trading, we have corporate bond trading, we have tri-party trading. The electronic markets are a place where everything can come together and we’re looking into increased automation internally now, which will allow us to merge all of the marketplaces into one screen and layer in, on top of that, the MTS and broker tech dealer-to-dealer platforms.

As we see these markets develop, I think it’s going to be incredibly important to link up the tri-party set that we’re trading with Client A with the BTPs and SPOTS that we perhaps want to buy or fund in the MTS dealer-to-dealer market. I think that’s where we’re going with this, where the trading of securities takes place in just one place and having this conduit is going to be very important, simply because it’s very hard to keep control of all of those different strains of data, you know, through these conversations.

Dan Barnes: So from the sell-side, you have a far more streamlined process and a better understanding of what’s moving in the inter-dealer market, and that can be then reflected into the D2C client market. What potentially does that have as an impact on investors?

Iain Colquhoun: this week in a better service and a better way to compare dealer to dealer. A lot of these platforms will offer additional, ancilliary data around the asset of the tri-party basket, which allows you to keep track about how to make more informed decisions. And I think that that’s going to be an increasingly important part of the process on the investor side.

Dan Barnes: Fantastic, thank you. Kat, can I just ask you, what are the next steps in terms of your evolution of the products?

Kat Dawson: We want to commit to keeping the platform competitive in terms of pricing. I think that’s really important for us as a business. What we’ve always seen as a common theme has been concern in trading costs from the sell-side. But what we’ve actually heard more recently is that actually we’re seeing concerns from the client side about the cost of trading. I think there’s perhaps an implied concern that somehow if the dealers are being charged too much, that somehow that’s going to have a knock on effect for them in terms of pricing.

So what we’ve done at BondVision, is we’ve got a very competitive fee schedule, particularly if you’re a strong dealer across asset classes, so across rates and repo, then effectively that trading could be free is capped at a fixed cost for the year. We’re finding a lot of banks are finding that a really appealing solution. That’s something that we’re definitely working towards to keep our prices competitive and make things as fair as possible for both the sell and the buy-side.

Dan Barnes: Kat, Iain, thank you both very much.

Kat Dawson: Thank you so much, Dan.

Iain Colquhoun: Thanks for having us.

Dan Barnes: I’d like to find Iain and Kat for their insights today, and of course, you are watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.