$ 50 trillion worth of bonds at the mercy of electronic trading


تAbe has enjoyed a great start in her new job, a start-up fund manager at Alliance Bernstein, an investment group that manages $ 500 billion in New York. In its first three months of business, I dealt with thousands of bond trades worth about $ 19 billion, never complaining or spoiling anything or even taking a break. Search for the algorithm At first, the aforementioned robotic employee at Alliance Bernstein had a problem understanding some of the pleasures of her superiors. At first Abe was stumbling over what they meant by “please” – but now she is doing about 35 percent of the trades Bonds. The Asset Management Company, which is considering moving its headquarters to Nashville, Tennessee, is optimistic that Abe will soon be able to automate large parts of the work of about 20 portfolio managers. Abe may seem normal to observers who have seen a series of technological revolutions reshaping the stock market, but the bond market has historically been a huge pillar, but it is old-fashioned for the financial system, with little transparency and deliberation often on the phone. However, a range of factors are now beginning to have a significant impact on the $ 50 trillion fixed income market. Banks complain that more burdensome regulation hinders their ability to play their traditional role in facilitating bond market activity. This has led to efforts to explore new ways of trading bonds. The hope is that modernizing the technological structure of the market can reduce costs and improve efficiency. The larger government bond market – such as US Treasuries or British government bonds – has been in a fairly long period of time, with some experts predicting that less-traded markets such as corporate bonds, local markets or emerging markets will be the next to go. There are still doubts that the bonds could already be traded in a similar manner to equities. Skeptics point out that a company may have issued only one stock, but dozens of unique bonds. In fact, there are only 43,000 shares in the world, but there are millions of bonds, each with its own legal and financial peculiarities. It is very difficult to break up large pieces of bonds without human ingenuity: skeptics compare that to the extent to which people are comfortable buying an Internet TV, but not buying a home. If modern regulatory regulations fall into a mess, modern technology gives the financial industry a way to turn the stalemate into an opportunity. Equity is essentially different from fixed income, but that does not mean that the latter can not benefit from advances in data science and artificial intelligence. Moreover, the shift to electronic form is just one aspect of how bond trading is dragged into the 21st century as banks and investors explore countless ways to modernize the fixed income market – as Abe sees it. “Before the crisis, the available technology was fairly old, but the available liquidity was so good that we did not care about it, and then the 2008 crisis came,” says Douglas Peebles, fixed income manager at Alliance Bernstein. “We want to make the market better, stronger and faster.”


When Richie Brager started on Wall Street in 1981, he had to press the telex, and the keys were so heavy that they made you feel like you were resisting your fingers. Most of the bond deals were arranged by telephone and trading rooms resembled bustling street markets. Today, Brager oversees trading in BlackRock, the world’s largest investment group, where quiet data scientists replaced many fan traders, and workstations look more like a NASA office. “The change in technology is like the night and the day over the past five years,” says Brager. BlackRock is one of the companies that injects funds into technology to reduce costs and improve the efficiency of its bond trading – a trend fueled by concerns about the health of the bond market. As the bond issue rises, traders say “liquidity has deteriorated sharply in recent years, as a slew of regulatory laws prompted banks to cut their trading desks.” Putting accurate figures on this decline requires skill and skill, as liquidity is an ephemeral concept. When you ask dozens of traders about it, you receive answers at least as many as you ask them. In general, liquidity is the ease of trading a financial asset without moving its price significantly. Most experts agree that liquidity has fallen for bonds – especially in times of market stress. This has led to a series of warnings over the years. “The liquidity drought could exacerbate or even provoke the next financial crisis,” said Norris Roubini, economist, “The lack of liquidity in the market will eventually lead to bankruptcy and collapse.” Even organized bodies expressed their concerns, albeit in more cautious terms. So far, pessimists like Eure, the perpetually pessimistic ass from the imagination of author Alan Alexander Millen, may have seemed to have been able to pass big tests without any big trouble. Even if the crisis fails to materialize, this does not mean that the bond market is in good shape. A number of banks and investment groups believe that part of the solution will be to modernize fixed income trading. This has led to a rapid shift towards electronic trading, similar to stock trading in exchange, in exchange for trading outside the official stock exchanges. The “price” market, in which major government bonds are traded, is now mostly electronic, and corporate bonds are beginning to migrate to trading platforms – at least for smaller portions of bonds. There are also indications that the traditional gap between the bond market and the “trader-to-client” market, where traders are trading with one another and the “rolling to customer” area, arranges trades for other investors, is now blurred, From all to all “for larger and more liquid bond markets. Greenwich Associates estimates that five of the US corporate bonds with excellent investment grade are now electronically – twice the size they were a decade ago.


Even “risky bonds” are starting to turn into that trend. One of the biggest winners of this shift is MarketAxess, the largest e-bond trading forum, which has seen more than twice the average volume of monthly bonds traded across the company’s trading platform since 2014 to reach $ 150 billion in 2018. Rick McVeigh , Said: “There is a long-term trend towards more electronic trading globally.” Banks have also begun to automate smaller bond trades to free traders to work on larger deals that still require a human touch. For example, Goldman Sachs’s “bond pricing engine” calculates a value of 10,000 bonds each day, allowing its algorithms to handle smaller trades. Initially, the Goldman Sachs algorithm dealt with trades worth less than half a million dollars, but today anything less than $ 2 million is “untouchable,” according to Justin Gumlich, a senior executive at the investment bank. “In four or five years, I will not be surprised if we have fewer traders, and we have more employees on the Khwarizmi side,” he says. Updated trading in the bond market is one aspect of a broader seismic shift. Even skeptics recognize a host of other areas where modern data science and computing can offer valuable improvements. “People are focusing so much on efficiency,” says Steve Zamsky, Morgan Stanley’s chief operating officer for fixed income, “from conversation on the electronic transformation of corporate bond trading to increasing efficiency of the ecosystem, from start to finish.”


Take Ellis Bernstein’s “Abe” as an example. Although the demand management algorithm is primarily built into the asset manager’s messaging system, its success in automating monotonous business volume and organization has raised the optimism that it will be able to perform more important tasks. Combining ABE with bond pricing, the Alfa trading platform and the Prism search platform, Alliance Bernstein hopes that the merged trio will become the fund’s default manager. “The market for the bonds will look radically different within three years,” says Jim Switzer, head of credit trading at Alliance Bernstein. The disruption also comes to the bank’s “syndicated loans” offices, which arrange and sell new bond sales by companies and countries. Author Michael Lewis once described collective loan offices as “learning everything, capable of everything, and accepting everything” in the trading halls, but banks are working on new digital platforms to fix a process that has long consisted of phone calls, , Instant messaging services, and invalid spreadsheets to collect and arrange orders. Even cell phones are taking their turn now. JPMorgan surveyed more than 400 fixed-income traders in last fall’s investment groups, with 61 per cent saying it was “very” or “fairly” likely to use a mobile phone application in 2018, The figure was 31 per cent the previous year. “We want salespeople and traders to focus on selling and trading rather than spending time on the heavy things we can do,” says Jay America, head of credit management at JPMorgan. In confirmation of the idea of ​​a coup, the Securities and Exchange Commission last year created an advisory committee on the structure of the fixed income market, consisting of major money management companies, stock exchanges, borrowers and bankers.


This was a vital development, says Ammar Kuchinad, head of strategy at Trumid, a new bond trading platform and a member of the committee. “Regulatory attention has been what drove innovation in the stock market,” he says, “evolution is a process, sometimes it seems so slow that you do not realize how big a change in fixed income has been.” Regulatory attention also highlights concerns about the evolving bond market. Technological disruption can be often painful and lead to undesirable side effects. As bond markets become faster and more sophisticated, they are likely to become more vulnerable to stock market imbalances in recent years. A vivid example of this was October 15, 2014, when 10-year yields on US Treasuries fell suddenly, and rose again, in a day-to-day move of 37 basis points, a move so steep in theory that no Is expected to happen only once every 1.6 billion years. The Bank for International Settlements (BIS) warns of “sudden events” that triggered this chaos, as the fastest-growing US traders in the US Treasury market took advantage of the vacuum created by banks’ retreat. Similar “flash events” can become more frequent across fixed income, as more automated trading spreads, according to the Bank for International Settlements (BIS) in a report in 2016. “Given the importance of fixed income markets in financing the economy, And policymakers have a strong interest in assessing e-transformation that can have an impact on market quality. ” Bankers and investors argue that nostalgia for the golden era of bond trading is futile. “People by nature do not like change, but these trends are rooted in the ground,” says Brager. “We will not go back.” One of the biggest disruptions in the bond market today is the rise of listed funds – tools that track indices negatively and originally work to reshape stock markets. Although listed bond funds are still lower than equity funds in terms of volume and sophistication, about $ 144 billion of funds have flowed over the past year. These funds allow investors to trade easily and efficiently in full baskets of bonds. This has been made possible by accelerating the shift towards further algorithmic trading – which he himself is accelerating – in the more liquid corners of the bond market. Many investors and analysts are nervous that the lack of congruence between the smooth trading capability of listed funds – which are traded in electronic markets just like stocks – and the intermittent liquidity of the instruments on which the funds are based is a recipe for disaster. Al-Ansar notes that the listed bond funds have been able to pass several major tests and argue that they improve the robustness of the fixed income market.

These funds make their bonds more tradable. It also allows banks to convert a basket of bonds that are rarely traded into a more liquid instrument through a process called “creation and withdrawal”, where “licensed participants” – often banks – take the raw material from stocks or bonds to create shares for funds listed in The stock exchange to be traded by investors. “The process of creation and withdrawal of listed bond funds can become much more sophisticated, active and liquid, as a result of technology reinforcements and broad acceptance of the instrument,” Black Rock argued in a recent paper. While there may be discrepancies between the price of an underlying bond and the instruments underlying it, there is an increasing number of trading companies that can arbitrate the difference and thus reduce it. In extreme cases, investors in a bond fund can receive small, proportionate shares of the bonds in the fund. However, given the path of growth in listed bond funds, and the development of funds investing in increasingly illiquid securities, critics’ fears are only growing stronger.

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