“Consumers yearn for fewer choices, not more choices, and they will yield to a trusted advocate who will clear a path through the chaos for them.” – Futurist Melinda Davis, founder and CEO of the Next Group
for etrading the sales credit should reward the trusted advocate’s (salesperson’s) overall ability to steer the customer to the right choice of electronic venue providing best execution for customer, then to maximise their use of that venue for applicable business. The credit itself should then represent a slice of the genuine value of that trade to the bank, taking its full lifecycle into account (see previous post on tiering). Looking at the genuine overall value of the trade will highlight where costs can be saved, which will then incentivise the salesforce to steer in the right direction. However, I suspect in many banks the sales credit is still a fairly flat metric based around bid/ask spread.
TowerGroup: Days Numbered for Independent EMS Providers? http://www.blackenterprise.com/yb/ybopen.asp?section=ybin&story_id=97324420&ID=blackenterprise
Remaining on the same train of thoughts as my blog about OMS driving FIX uptake on buyside in fixed income space… where is a standalone Execution Management System providing a customer interface into the fixed income electronic markets (tradeweb, marketaxess, bondvision, and so on). Here I’m not talking about a full-rambo Order Management System, with full-rambo OMS functionality and price, but just the straightforward aggregation of etrading connectivity so customer runs EMS rather than each platforms separate application/workstation. This of course has same potential impact on FIX fixed income uptake on buyside, only sooner as theres clearly no reason to implement EMS if youre not also “doing” the connectivity piece.
From technology perspective surely the EMS view is just about the aggregation of these markets into a single market-depth screen etc, with single (look-and-feel) order entry functionality, and a single feed into booking systems etc – something ION marketview (at least) has been doing on sellside for years. And with each of the platforms offering a FIX interface on customer side, this is actually then just aggregation of a handful of FIX connections – something existing EMS guys are clearly able to do. So is fixed income aggregation something the existing EMS guys have appraised and discarded- even though it could get their app onto customer desktop (even if only in “lite” form for FI)? It will be a shame if the concept of a dealer-independent EMS dies off just because of the tough sell to customers because of the commitment to use that providers algos in other product areas.
FIX will become the de-facto protocol for fixed income order routing from a buyside perspective. But it is going to take a while so don’t hold your breath…..This year we’re seeing many more buyside firms implementing fixed income order management systems (OMS). But even with their own desktop (the OMS) from which they conduct proprietary value-add alpha-seeking decision making, it is still incredibly rare for customers to acknowledge a desire to imminently aggregate their participation in the electronic fixed income markets into this desktop. OMS are being put in place primarily for compliance benefits.With typical maximum integration between buyside systems and the etrading platforms currently to upload/download orders and trades via a spreadsheet, the platforms’ existing buyside FIX connectivity offering is clearly very little used at this point. But the FIX connection is there as and when the appetite to connect from OMS arrives. And in terms of bang-for-buck, customers clearly will connect to these platforms first – a conceptually simple change to existing workflow so you can “press a button to release the orders” to market rather than upload/download via spreadsheet.After that, with dealers offering that customer direct connectivity by way of a service enhancement/cost reduction exercise, we see a landscape similar to the equity world now – where individual customers connect to a few chosen dealers direct, and via market intermediaries (i.e. the platforms, above) to reach other pools of liquidity. This builds on the pipes and connections already in place from the OMS. These use FIX.
So with the players coming onto the pitch in the form of the OMS being deployed in buyside, and the OMS vendors often being FPL members .. and the platforms already “offering” a FIX interface for buyside to connect for their order flow, it is surely an open goal for FIX to become the de-facto standard in this space .. in which case it’s just a matter of time…..
The measurement of operational performance to rank your counterpart isnt a new concept for the buyside, as its an accepted and expected part of the dealer selection process. Consequently sellside expend a lot of effort to ensure their trading process overall stacks up well compared against their peers. At present this measurement is a one way street, but soon we will see buyside similarly incentivised to review their aged/mutated trading processes and even contractually agree maximum levels of human intervention in trade workflow, in order to secure the best price available on their trades.
Of course I don’t forsee a sellside stampede to dramatically worsen a “good” clients pricing just because they need a bit of hand-holding in their trade workflow, but a maturing electronic market and also current regulatory initiatives that are highlighting the importance and impact of transaction processing costs, and doing so without this appearing “just” a back-office issue, make it reasonable to expect the cost burden of “unnecessary” human intervention in customers workflow to shift back towards the buyside over time. After all, who can argue with those choosing to trade by voice rather than a cheaper electronic venue, or to manually amend 30% of their trades post-execution by paper rather than direct gui, paying more for the privilidge of doing so?
I can’t understand why some sellside reps at the etrading seminars – as recent as BMA etrading 2006 (you know who you are!) – are still saying that they “do” etrading solely as an additional service to customers. I and some others on sellside have been publicly saying for years that electronic channels are actually our distribution channel of choice for liquid and commoditised products, as we get scalability (customers and/or number of orders) and with decent onboarding and enablement procedures in place can guarantee better operational control from having less human intervention in the trade lifecycle.
So why isnt everyone openly saying this? Our collective sellside drive to capture flow electronically isnt detrimental to the customer – this really does offer a win/win. Generally customers don’t want every sellside salesguy they are covered by calling them up to discuss life/footy then ask what trades they want priced, and are happy to have the option of sending their orders, inquiry, bid lists etc through to their chosen banks as and when they want. They trust the electronic venues, and can on occasion be heard proclaiming that with a choice price in tradeweb or bloomberg bbt/allq or wherever, they can even get a good price on their odd lots. Sellside of course get the cost benefits of freeing up their salesguys from the vanilla stuff that can be captured electronically, to focus on giving the customer that killer investment play, based on their deep knowledge of that customers strategy – so genuinely adding value in terms of customer relationship, which (as long as the killer advice is good!) benefits both sides.
Those still saying they are offering etrading as just another channel to offer their customers are clearly missing the point.
Latest pr showing that even though MarketAxess had FIX offering back in Nov 04, ‘better’ STP is still newsworthy. So just need customers to really make use of this then :-s
“LatentZero has formed an alliance with MarketAxess, the leading electronic, multi-dealer to client platform for U.S. and European credit fixed income and emerging markets securities. The collaboration will see improved STP and enhanced electronic trading connectivity for users of LatentZero’s order management and trading solution, Capstone Minerva™.”
Mifid is finally on the table for the fixed income markets. Even though the impractical one-size-fits-all-of-the-market best execution benchmarking proposal (from IBM for FSA) has been discussed and rejected as unworkable by the market participants (LIBA, BMA, ISDA), the likelihood is that the regulators will still choose to impose some additional regulation – they are regulators after all. The consultation period ends Aug 17th, and we wait until the FSA response detailing their proposals for best execution which is due in October. As yet I have still not heard of any specific example of market failure or operational issue with the fixed income market that the regulators are trying to address. But I do hope they see the potential for irony if they place onerous or unworkable regulatory constraints on the fixed income market that achieve nothing other than driving liquidity away and so making the market a much more scary place for the “uninformed investors” they are supposedly trying to protect. I also hope FSA has a social conscience and so recognises the hugely negative social impact that they could cause to all living in major european cities by regulating these markets to the extent that much of the liquidity moves ‘offshore’.
Alas etrading as it stands is not the full answer. Just looking at a plain vanilla bonds environment, sure there is certainly an angle for the existing multidealer etrading venues to help with best execution reporting – which should suffice the majority of institutional fixed income etrading flow. But this still leaves the rare breed of customers who have their own fi order management system hooked direct into dealers (who are also likely to be savvy enough to be able to document their own best execution policy), and it also leaves the (typically) smaller guys, or those customers where fixed income is not their primary product set, who have singledealer electronic trading functionality. And the big one of course is that there are still the 000000s of fi voice trades per day that will require some form of best execution record for audit… bet you cant wait ’till October for the punchline.
so does this give (new) ION the toolset to help get them onto sellside desktops? At the moment most firms only using the gateways and connectivity.
While the majority of trades from institutional customers are allocated/split, and the workflows offer a degree of STP, true zero touch trade workflow is still the exception rather than the norm.
Customers measuring their STP rates based on how much intervention was required to get the allocation instructions out the door really are missing the point. Even if their machine can spit out a fax or telex or email automatically with their allocation instructions and they can count this as 100% STP’d, sellside still have to employ someone to receive and deal with the instruction – as well as placing a manual step in the process which slows everything down, this also increases transaction cost because these human stages do go wrong. Having people in the workflow increases transaction cost for both sellside and buyside, as “people time” is used both sides to deal with trade exceptions that result from the initial human error. So zero touch trade flow needs zero human touch – which means machine-to-machine instructions.
While there should be real interest from both sides in reaching true zero touch trade flow, the paper and people based scenarios above are still definitely the norm. This is not because the technology does not exist. The major fixed income venues (tradeweb, bloomberg, marketaxess, bondvision, and even reuters now) offer their own electronic routes for post trade allocations etc, which are plumbed direct into the dealers trading systems (on the assumption all dealers have chosen to hook them up). But these are not widely used – customers prefer a generic solution that spits out paper or an email.
So is FIX for fixed income the answer in the post-execution space? Not yet, as major accounts have omgeo or their own fax/telex thing setup so they need ‘a reason’ to change. Buyside firms merging then rationalizing their operational effort may trigger this, but if the message to buyside is that alls well and good in (say) euro govvies and lets apply the same to next product set, then surely we’re papering over the cracks, and we need to get the post trade stuff sorted out in order to really progress. So how do we do that?
you have to start sometime! -well this blog is mostly related to electronic trading.
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