Making an EMS enhance bond trading

Published on 22 July 2021

Only 5% of buy-side bond traders use an execution management system (EMS), despite real advantages they can offer. These include enhanced timing and greater scaling up of trading activity. Opportunities are being missed today, as instrument selection can occur without the right levels of pre-trade information on liquidity and price being made available to the trading and portfolio management teams.

Dan Barnes: Welcome to Trader TV – your insights into trading for professional investors. I’m Dan Barnes. Execution management systems have seen very low adoption in fixed income markets so far by the buy-side. However, that’s changing.

Here with me today to discuss that are Tim Morbelli, head of municipal trading at Alliance Bernstein and Gareth Coltman, head of automation at MarketAxess, and we’re going to discuss how buy-side funds can make better use of EMS today.

Guys, welcome to the show.

Gareth Coltman: Thanks Dan.

Tim Morbelli: Thank you for having us.

Dan Barnes: Gareth, can I ask you, first of all, where do you think buy-side traders are struggling to get the most of their EMS and their OMS today?

Gareth Coltman: I think we need to recognize that fixed income is different to other markets, equity markets and listed markets where the idea of EMS came from. There are different, dominant protocols. In equities markets, liquidity nearly always firm, predominantly visible vs on-demand liquidity in fixed income markets.

Tim Morbelli: EMS is a relatively new product within fixed income. We looked at some studies that have been done and it’s only a 5% penetration on the buy-side, whereas in OMS it’s roughly 95% penetration, meaning almost everyone has an order management system today. That’s tremendous growth opportunity for providers to come into the asset class and provide an offering that enhances a buy-side trader’s workflow, which is why we actually invest in building one, because we actually did see the benefit of having an execution management system that can overlay your existing order management system today, and offer you additional features and keep up with modern day protocols that may not be supported or at least not yet supported by your existing OMS provider.

Dan Barnes: What are the benefits for traders if they can engage more effectively with a platform through the investment lifecycle?

Tim Morbelli: So the ultimate key is time saved, and that really does add up. If you think about how long it takes you to do a transaction; anywhere from three minutes, call it, I have to IB somebody, wait for them to come back, once they come back, yes, done. They send a VCON. Ok, wait for VCON match trade, it’s booked.

Or I send out an RFQ on MarketAxess. I’m waiting for that to queue up, and then I have to go back to the interface and engage on that interface. We actually have the OEMS or the EMS where you live and breathe within that, so you can actually do all of that together. Now you’ve streamlined it so I can engage electronically, do a trade click. I’m done. I just took something that went from three minutes to three seconds. On top of that, you’ve now achieved scale and that’s what we’re trying to do. With that scalability nature of your trading desk, you can start to look at ways to offer other products for our clients.

Gareth Coltman: I strongly believe there are opportunities to optimize execution today, that are being missed in the existing workflows. So often clients are making a decision about using or not using a platform fx, without having access to data analytics pre-trade that could help them optimize their approach to market. And I think many clients underestimate the depth of liquidity that is available electronically on platform and many clients are surprised to learn how much of our activity is actually brought in trading. In terms of the investment lifecycle, very often what I think happens is that security selection is made without the full picture of available liquidity and what the likelihood of the execution outcome is. So if a portfolio manager can get a better understanding of the cost and the likelihood of execution, they can potentially consider alternative securities that provide exposure they’re looking for with a lower cost of execution.

Dan Barnes: Which components do you see as being integral to EMS’ integration into the fixed income ecosystem?

Gareth Coltman: You need free trade data for price discovery, connectivity to the broadest possible set of liquidity, all-to-all, you need great analytics. And depending on where you are in the world, you need the ability to capture all of that data for best execution and regulatory purposes. You can, I think, get all of those via our venue. So the clients who are worried about the cost benefit, that obviously does bring into question how much additional value do they get from the EMS? I do hear from most clients, their biggest concern is liquidity. It is, ‘does the work flow that I’m designing, give me access to a broad enough set of liquidity rather than just one or two liquidity providers?’

We do need to be careful about how much we put into the EMS. If we’re starting to push liquidity aggregation, and we’re starting to meet buyers and sellers in an EMS, the question is, is that the right place for that? Or should that be on a more transparent regulatory venue?

Dan Barnes: And which parts in the workflow do you think needs to be in the EMS, and which can be held in the single dealer platform or the multi-dealer platform?

Tim Morbelli: The goal is to put as much as you can within your EMS because you want to live within that ecosystem, but that doesn’t mean you don’t leverage the capabilities or the data streams of the functionality of those respective platforms. So it’s a case in point, the hybrid model is actually exactly how we’ve gone about it. We have some asset classes where we have developed our own algo price for auto-execution. We leverage the auto execution capability, but referencing our algo price. We have other asset classes that we actually leverage the venue provided price such as CP+ or AiEX, and we can actually leverage that reference to then auto execute the trade. So that’s the hybrid model where you have the flexibility of both, and that’s where it’s up to the user or asset class to then determine what they want or don’t want to use.

Gareth Coltman: Auto execution is a great example of that, where the client can control to auto execution from their EMS, but can still leverage MarketAxess data and our rules engine in terms of making decisions around automation.

Tim Morbelli: Data is at the core of everything that we do. You can’t run an optimization engine without knowing what’s going on in the marketplace. You can’t create liquidity scores without understanding what’s available in the marketplace. You can’t run a quant model without actually knowing that you can actually execute on the trade that you’re trying to do. And all of that factors into creating orders and generating opportunities for the EMS to then go and actually engage with the marketplace.

I also couldn’t agree more with Garrett’s point that an EMS is not supposed to be a trading venue. An EMS is supposed to be a way to connect better to the marketplace and do that in a streamlined fashion and also offer you additional tools that you maybe didn’t have at the forefront to start with.

Dan Barnes: Guys, that’s been fantastic. Thanks so much.

Gareth Coltman: Thanks. That was great, Dan.

Tim Morbelli: It was fun.

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