THE CHANGING FACE OF FIXED INCOME.
Alexander Y. Sedgwick, Vice President, Head of Fixed Income Market Structure & Electronic Trading at T. Rowe Price discusses how the industry is evolving to meet the challenges and leverage opportunities.
How has regulation, and MiFID II in particular, impacted the fixed income industry and how do you see the industry preparing?
From a trading standpoint, the industry continues to focus on delivering best execution with traders using pre- and post-trade tools and transaction cost analysis (TCA) as these tools evolve. Having a strong governance structure is also a key component, along with a feedback loop at the desk level. The feedback loop ensures that traders use data about prior trades to improve future execution. At a more granular level this involves looking at execution across counterparties, different venues, and factoring this into future trading decisions.
Another key element is the ability to derive context, clarity, and actionable insights from market data. Greater transparency provides benefits including a better understanding of market flows while also supporting the price formation process. It helps buyers and sellers determine where a bond could potentially trade.
Aggregated pre-trade information across markets has become more important in an environment with increasingly fragmented liquidity and regulatory focus. How is the industry adapting?
This goes back to my point about the importance of extracting value from data. There are some buyside firms developing that capability by hiring data scientists but this isn’t yet pervasive. I do think there is a large value opportunity for both dealers and electronic trading platforms because they have already developed this expertise over the years in mining data to provide or deliver liquidity. It will be interesting to see how this trend plays out over the next several years and who looks to address this need.
The growth of electronic trading in fixed income has always been driven by efficiency, but it was predicted at the beginning of the year that data science and analytics would fuel new levels of smart trading this year. Has this materialised and how do you see it evolving?
I would say that this is more of an evolutionary rather than revolutionary process. I haven’t seen increasing levels of automated trading in credit, but that doesn’t mean progress isn’t being made. Artificial intelligence and impactful statistical analysis require large amounts of data as well as significant business knowledge. Cleaning the data alone can be a substantial undertaking – so I think it will be a matter of some time before this develops and is in widespread use.
However, there are plenty of examples of increased automated trading in other areas of the fixed income markets including treasuries and foreign exchange. While the opportunity set is smaller in less liquid parts of fixed income, there is certainly pressure on the asset management industry to be more operationally efficient and I believe that electronic trading also fits nicely into this niche.
I read you were discussing all-to-all (A2A) trading at a recent conference and wondered what your thoughts were on the concept and why A2A models failed in the past? Will they succeed now?
A2A platforms are not new. US Treasuries have traded on exchanges in the past and since the advent of electronic trading in the late 1990s there have been a number of credit platforms that were all-to-all. It is a useful protocol but used most effectively alongside other sources of liquidity such as traditional dealer liquidity. This is particularly true with the distressed or more illiquid end of the market, which is still traded on a request for quote basis. I do not think that an all-to-all platform alone could address the liquidity needs of the credit market, primarily because the majority of buyers and sellers do not come to the market at the same time. That said – if used alongside other protocols and platforms, all-to-all platforms do provide a complimentary source of liquidity.
How do you see fintech/regtech changing the face of fixed income in general?
While less visible, there has been a substantial impact on the mid and back office with the increased standardisation of messaging and connectivity. This is laying the groundwork for participants to connect to a variety of platforms as well as counterparties and data providers more easily in the future. I think that many market participants agree that everyone gains through upgrades in market infrastructure. As a result, there has been much more industry collaboration, with initiatives being launched by the buy and sellside as well as the vendors. Regulation has also been important here as the industry works to define best practices and outline a more standardized set of business practices – this requires greater co-operation across the industry.
What changes has T. Rowe Price made and plans to make in the current and future environment?
At the moment, one of the most important things that we are working on is transaction cost analysis for global fixed income products. TRACE has always been helpful in the US but as the quality of evaluated pricing has improved we are looking to standardise our TCA approach across products. As part of this effort we are actively looking at some of the visualisation and data aggregation tools that can pull information into a single place and assist traders in framing the market on a pre-trade basis.
There is a lot of press about the US deregulating. What rules do you see being rolled back and how will it impact fixed income markets?
I expect continuity in many of the regulatory efforts we have seen over the last several years. Many of these, and I am thinking of MiFID II and the reporting of Treasury trades, are focused on greater transparency for market participants and regulators alike. Outside of fixed income I expect to see some review of at least parts of RegNMS and rules that impact capital formation.
What do you foresee as the biggest challenges and opportunities going forward?
I think there are big opportunities in both market data and electronic trading. First and foremost, we are working to become more operationally efficient. So, the question is how best to engage with our trading counterparties and build the connectivity and infrastructure to do that.
The challenge is going to be how to use the information generated by more electronification to improve how we interact with the market. While I think we’ll continue to see increasing investment in this expertise at various firms, I also anticipate more vendor solutions coming to market as firms wrestle with the question of whether to buy or build this capability.
Based in Baltimore, Maryland, Alex Sedgwick is Head of Fixed Income Market Structure and Electronic Trading in Global Trading at T. Rowe Price. Alex has over 15 years of investment experience, and prior to joining T. Rowe Price in 2014, spent eight years at MarketAxess Corp. in New York, where he was most recently Head of Research. He earned a B.A. in economics and politics from Washington & Lee University, and also has the Chartered Financial Analyst designation, and is a Series 7 and 63 registered representative.