Integrated data aggregation

Best execution in fixed income trading -Rhetoric or reality?

In Blog by Abdullah Hiyatt

The obligation to achieve ‘Best Execution’ in the trading world is clear, but is this just a matter of rhetoric for many fixed income buy-side firms, or is it a tangible reality? As we dive into the specific challenges of executing trades in bonds and derivatives, we question whether the traditional methodologies stand up to scrutiny or if there’s a need for technology-driven transformation.

The paradox of best execution in fixed income trading

Fixed income buy-side firms, particularly those trading in a variety of bonds (with differing maturities and ratings) and derivatives, all aim for the best possible outcomes for their clients. However, the question arises – how can they substantiate this claim of best execution?

Most agree that best execution is not solely about price. Although price is a crucial component, other factors like the speed of execution and the likelihood of executing are vital. Given the increased number of venues over the years, a trader’s desk would need vast screen real estate to view all applications along with subscriptions to these platforms. If best execution is based on multiple factors, the outcome should be demonstrable. The performance of the fund over a period is what ultimately counts.

Consider a firm trading bonds. These firms often subscribe to a limited number of venues, stage orders, and are confined by the technological constraints of their Order Management Systems (OMS). The liquidity of these bonds can vary greatly depending on their maturity and rating. In such a scenario, achieving best execution becomes more challenging due to a limited market view, the potential impact of order staging on execution quality, and the liquidity constraints of specific bond types.

Traders need to gain access to more venues, but how do they do that? Well, Apollo’s single screen allows a single view of all liquidity providers and venues, axes, prices, and more importantly, is able to capture these data points throughout the lifecycle of orders. This includes the ability to execute multi-legged orders and eliminates the need for external applications like Excel, screen prints to demonstrate compliance, regulatory, or client requests. Asset managers can then utilize this data for creating their own Transaction Cost Analysis (TCA), implementation shortfall, and other metrics, offering a granularity that goes beyond the scope of those who merely look at a single application and are unable to consider OMS order generation time.

The need for cutting-edge technology

Interestingly, while many traders limit themselves to a few venues and antiquated OMS systems, they often use comparison websites for personal tasks such as shopping or insurance purchases. The question, then, is why are we not applying this same technology-empowered approach to trading? What prevents these firms from aggregating market data to improve the breadth of their market view and thereby enhance their trading practices?

The integration of advanced technology in trading platforms can potentially transform the scenario. By consolidating data from various sources into one platform, firms can enhance their execution capabilities. For instance, a buy-side firm trading in credit derivatives could leverage AI and Machine Learning (ML) algorithms to predict market movements based on consolidated real-time and historical data. This can lead to improved decision-making, better risk management, and a more robust commitment to best execution.

This is where the THETA’s Apollo platform shines, providing an innovative solution that aggregates axes, prices, orders, executions, including other signals and analytics. By linking to multiple venues and directly connecting to banks and brokers, Apollo offers a comprehensive market view in one platform. The result? Increased productivity, reduced risk, and an enhanced ability to meet best execution commitments.

Turning rhetoric into reality

Achieving buy-side fixed income best execution is not just about ticking regulatory boxes. It’s about leveraging the right technology and harnessing data to provide optimal outcomes for clients. By integrating cutting-edge platforms like Apollo, buy-side firms can transition from mere rhetoric to reality in their best execution practices.