Liquidnet study underscores the role of advanced technology.
Corporate bond asset managers are looking to switch or upgrade their order management system (OMS) and execution management system (EMS), according to a new study from Liquidnet, Future Tech – Trading Bonds Post MiFID II, which explores how MiFID II impacts the role of technology in trading corporate bonds
Over three-quarters of buyside respondents interviewed across Liquidnet’s member network said they plan to upgrade their technology services in 2018. Half of those expect to implement an EMS, while 43% plan to upgrade their OMS and 10% will switch OMS providers.
Of those looking to install an EMS, 94% are choosing to do so to manage liquidity. However, the size of the firm plays a factor given the cost of implementation. Fifty seven percent of small firms are not investing in an EMS at this stage compared to 64% of their larger counterparts who are.
Compliance with regulatory initiatives such as MiFID II is driving the adoption of technology across European bond dealing desks, particularly with the focus to meet best execution requirements.
“Historically, some European fixed income portfolio managers were seen as slow to appreciate the role bond dealing desks can play in implementing investment strategies and generating alpha,” said Rebecca Healey, head of EMEA market structure for Liquidnet and author of the report.
She added, “Firms are now beginning to recognise the central role technology plays in making workflows more efficient, allowing trading desks to better evaluate the true cost of execution and not solely focusing on the lowest price possible as that is not necessarily ‘best execution’.”
Around 76% of respondents are focusing on the need for standardised connectivity throughout their workflows, as legacy technology makes the fluid flow of accurate data challenging.
Looking ahead, Liquidnet foresees an extension of the role dealing desks play in implementing investment strategies from merely executing a PM’s instructions to a true execution partnership, while still ensuring separate trading functions to avoid any perceived conflict between execution and advice. To achieve this, technology tools will be required in order to give greater control to the buyside trader over the execution process.
“Basically, what the survey points to is that the main requirement for the corporate bond trading desk of the future is the ability to combine order management, data aggregation, and access to electronic liquidity with the overarching goal of empowering the trading desk to deliver more alpha,” said Constantinos Antoniades Liquidnet’s Global Head of Fixed Income.
Firms are not only addressing technology issues but also behavioural shifts across organisations. Dealing desks now need to source liquidity from multiple locations as well as understand the optimal point of entry or exit of a trade – even utilising an alternative risk/reward bridge investment while waiting for improved liquidity sources to emerge.