The Tabb Group holds a fixed income summit each January that serves as a key gathering point for the industry; an industry that has been dealing with many of the same challenges that face other financial markets: increasing regulation, change spurred on by new technology, and the ensuing market structure shifts that have altered the composition of liquidity.
Maven Wave has written about the event the past two years (Perfect Storm – Navigating the Confluence in 2015 and The Big Fix in 2016) and returned to do the same this year but faced a dilemma: Tabb explicitly barred the media from the Charting a New Course event. With panels that included debates between the buyside and the sellside, voice brokers v. electronic market makers, and new platforms v. alternative liquidity providers, the discussion was lively but also largely unreportable due to the “no press” restrictions. What to do? With anonymity required, it’s not even possible to lay out the points and counterpoints in the debates as it would be clear who was on one side or the other! What follows then is a generalized look at the topics covered and some key takeaways on where we’ve been and where we’re going.
Framing the Discussion
Anthony Perrotta, Tabb Group CEO, was also master of ceremonies and got things started by sketching out the past, present, and future landscape for fixed income. Not surprisingly, politics and regulation topped the list with the incoming Trump administration and upcoming elections in Europe at the forefront. Other important topics include questions of transparency and best execution, particularly with the SEC approval of new rules that will require the reporting on transactions in Treasury securities to FINRA, as well as a continued increase in the “riskless-principal” trading business, further growth in electronic trading, and expansion of trading protocols. While many of these themes were also emphasized in prior years, the overall message is that the change that was previously a topic of discussion is now a reality that is impacting the market.
The program featured panel discussions on transparency, the FX market as a model for change in the fixed income space, the future of voice-driven execution, and tools for the new market structure as well as an “armchair” discussion between dealers and investors and a “fireside chat” with former U.S. Senator Chris Dodd of Dodd-Frank fame.
What Was Talked About (Without Saying What Was Said)
In many ways, the substance of the conversation changed very little between this year and last: regulation continues to grow, liquidity is a challenge, and the market in general is anxious for what lies ahead. Within these general topics, some themes emerged:
- Liquidity is in the eye of the beholder: In discussions on topics from transparency to voice-driven execution, the topic of liquidity was front and center. Economic, technological, and regulatory changes have engendered shifts in the market that continue to be felt. However, how the nature and meaning of transparency appears is open to debate. For some, however, the liquidity challenge is an enticing opportunity. Trading firms such as KCG and Citadel have increased their presence, while other sectors are responding as well.
- Platforms to watch: In 2015, Tabb Group analyst Rad Khasawneh estimated that there were as many as 40 electronic fixed income platforms in existence. Fast forward to 2017, and a recent report counts as many as 128 platforms to choose from! In the face of this continuing proliferation, what are the platforms to keep an eye on? Three received more than one mention at the Tabb event:
- Algomi: “Algomi is innovating the way the buy-side and sell-side trade fixed income securities, while preserving the overwhelming importance and dominant value of voice trading by empowering sales and trading operations. Algomi’s revolutionary technology empowers fixed income professionals to fulfil their precise needs, for both sides of the market.”
- Directpool: A partnership between CastleOak Securities and Bloomberg, Directpool is a platform for U.S. corporate bond electronic trading. “Over 40 institutional clients and 27 sell-side dealers have traded with CastleOak Securities through DirectPool™ since its first trading day in September 2016. Volume levels have steadily increased with $3+ billion of investment grade corporate inquiry and nearly $1.5bn in trades completed.” The platform formally launched on January 12.
- OpenDoor: “A cost-effective, all-to-all, session-based trading platform that enhances liquidity of Off-the-Run Treasuries (OFTR’s) and TIPS, OpenDoor offers free access to a browser-based platform. Customers include some of the world’s largest asset managers, central banks, primary dealers, hedge funds, and trading firms.” A much ballyhooed startup, OpenDoor has intentions to go live later in Q1 2017.
- FINRA reporting will have a big impact – eventually: Beginning in July, FINRA will begin requiring the reporting of transactions in the secondary Treasury market by FINRA members. As is so often the case, the origin of this change arose from crisis, specifically the Treasury market “flash crash” of October 15, 2014. Specific reporting requirements will be limited at first but over time more and more information will be required for reporting. In the long run, this information will spur further changes to market structure at the same time that it increases transparency and, hopefully, market stability and safety.
There is a danger in taking comments and complaints at face value at industry confabs such as the Tabb Group fixed income event. Those that sit on panels often represent the old guard of the industry and there’s a further selection bias because it’s a truism in any trading community that those that are doing well will never let on to that fact in public. With that in mind, it’s helpful to look at how both the content and tone shift over a longer time frame. In both regards, the 2017 edition of the fixed income outlook gives cause for some optimism. Topics discussed were less speculative and more directed while exciting new platforms like Algomi, Directpool, and OpenDoor point to real world solutions being activated to meet the needs of both the present and the future. At the end of the day, significant issues are confronting the fixed income industry but the needle is pointing in the right direction.
As always, thank you for reading. Please let us know if you have any comments or questions.