ION’s Edoardo Pacenti says technology adoption key to improving execution

• Buy-side needs more adoption of automation tools to reduce risk 
• Vendors must enable efficient front-end workflow integration  
• Trading desks can’t be reliant on widespread manual pricing 

On 2 May 2024, the Bond Dealers of America (BDA) trade association hosted a discussion on order management systems (OMS) and execution management systems (EMS).

Edoardo Pacenti, who leads product development for Fixed Income Automated Trading Solutions at ION, was among the panelists and shared his insights at the BDA event, which was primarily attended by sell-side financial institutions.

How technology vendors help clients achieve their goals 

A recent Coalition Greenwich conducted a study in which almost half of the buy-side respondents agreed that trade automation tools and executable streaming prices from dealers would be the most critical technology on their desks.

Pacenti said many of these technologies, including streaming prices, are readily available. The buy-side needs to increase the adoption of these tools to improve execution and reduce risk through more significant degrees of automation.

For the sell-side, technology to differentiate the offering depending on the workflow preferred by the buy-side already exists. For instance, the ability to support price streaming, size laddering and all-or-none buckets is available and can be implemented quickly. The risk to be mitigated is making the market workflow too complex for trading desks to adopt it effectively; hence, it is essential to normalize these protocols to minimize overheads for the trader. Moreover, Pacenti said, integration with post-trade workflows, such as auto-hedging, is fundamental to providing liquidity in an automated way across products, once automation is enabled to provide more flow to the buy-side.

BONUS CONTENT: Discover how fixed-income trading is on the cusp of change as EMS technology evolves.

From the buy-side EMS perspective, specifically smart order routing, integrating more liquidity providers is a differentiating factor. The ability to integrate an EMS with central limit order book (CLOB)-style venues like a retail market and the traditional RFQ (request for quote) platforms gives more options to fill an order.

For Pacenti, vendors have the mission to enable efficient integration in trading desks’ front-end ecosystems, introducing new features seamlessly into existing traders’ toolkits.

For example, previously, there were two kinds of RFQ negotiations: competitive and bilateral. The variety now is more significant, including all-to-all, portfolio trading, and odd-lot matching. “To thrive, trading desks must have consistency, reliable pricing, and be able to prioritize important business versus small tickets or nonrelevant business nimbly,” he said.

Sell-side transition from D2D to more D2C 

Buy-side tools catering to sell-side clients are increasingly in demand. To achieve optimal execution, dealers need access to D2D and D2C venues and reach out to specialist dealers to cover non-core products. According to Pacenti, this effectively means liquidity sourcing as a buy-side participant through the functionality typically available through a buy-side EMS, such as smart order routing.

The role of credit portfolio trading and other models 

Portfolio trading is another aspect of the bond market that has been gaining traction and requires more automated workflows. It is closely linked to the surge of exchange-traded funds (ETF) trading in the last few years.

A credit portfolio, by its very nature of bundling a variety of securities into a single package, requires it to be traded on an all-or-nothing basis. Therefore, it is used by the buy-side to secure prices for non-liquid inventory that would have otherwise not been picked up on a bond-by-bond basis. As a result, the sell-side needs to manage inventory they are not interested in keeping and would not price competitively if traded individually. In these cases, ETFs are suitable instruments for liquid hedges for the sell-side desk.

BONUS CONTENT: Find out more about the rise and future of credit portfolio trading.

A few models are establishing themselves in the sell-side space when managing portfolios, as some desks opt to distribute portfolio line items across specialized desks within the bank to price individually, while others opt to set up dedicated algorithmic desks that price the entire portfolio, hedging with ETFs.

“In short, independently from the model there is a drive to automate the pricing workflows to enable efficient pricing and risk management of portfolio trades. This is essential if volumes continue to rise. Trading desks can’t rely on widespread manual pricing,” Pacenti said.

Technology and regulations 

Implementing smarter pricing and risk transfer, increasing marketplace efficiency, and improving liquidity are crucial to trade management.

A key aspect for desks is accessing data from platforms and using it with new artificial intelligence (AI) models at a reasonable cost and with minimal integration barriers. Pacenti said those with a proprietary algorithm or an AI-based execution strategy should be able to easily plug it into their workflows, if they have an existing, API-friendly, interoperable platform.

According to Coalition Greenwich data, during the first quarter, 44% of IG (investment grade) and 29% of HY (high yield) traded electronically, with gains in efficiency tools like algorithms, advanced pricing, and rules engines.

Higher volumes, liquidity, and faster prices impact risk profiles and complicate regulatory requirements, such as one-minute reporting. Regulatory reporting relies on automation, so higher digitization of trading has to be supported by digitized workflows.

When talking about the proposed shortening of the TRACE reporting time frame from 15 minutes to 1 minute for corporate bonds, agencies, MBS (mortgage-backed-securities) and ABS (asset-backed securities), there is no fundamental difference from a technological perspective. Automated reporting workflows to TRACE are already available.

What does change, however, is the value of this information on TRACE for other market participants, and it raises important questions, according to Pacenti: How can counterparties to the trade, such as the dealer, handle the disclosure within one minute and hedge effectively? How can other market participants incorporate this quasi-real-time information quickly into their pricing decision-making?

Technological solutions, like automated hedging using algorithms to monitor pre-determined risk parameters, will be front and center.