The fixed income and foreign exchange OTC markets are undergoing a rapid transformation with higher regulatory scrutiny and increased electronification of trading. The Buy-side Perspectives caught up with Ravi Sawhney, Global Head of Trade Automation (OTC) at Bloomberg LP to get his views on how technology can support the trading desk to increase their productivity. 

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With the increasing amount of electronic trading within fixed income and FX, how do you see technology becoming an extension of the buy-side’s counterparty relationships?

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Technology is already heavily embedded in the internal workflow and processes of all buy-side institutions given their focus on improving efficiency through the adoption of technology over the last 20+ years. This has now grown to include how they interact with their trading counterparties, and is the latest extension of this trend, bringing the utilisation of technology to the forefront of decision-making and execution. Previously technology was used further upstream with regard to execution responsibilities, but that has gradually made its way downstream to the point of being at the frontline of execution.

The buy-side is currently using technology in two ways: one is automation, and the other is what drives that automation, which is the analytical side of trading activity with counterparties.

 

We’re seeing a significant increase in analytical activity for the buy-side to understand the quality of the execution relationships they have with their counterparties and then applying that analysis to the active execution via automation tools.

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So, if an investment firm takes on a significant new mandate for example, it does not need to scale up with human traders at the same rate as before, but use automation to bring optimize the trading process. This approach of complementing humans with machines can result in measurable productivity gains for the firm. Automation augments the ability of human traders, who can redirect their time to high-touch orders and more profitable relationship-building tasks. 

 

 

Where does trade automation come into to play and what is the biggest challenge in taking an electronic trade to an ‘automated’ electronic trade?

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Automation is a natural evolution of performing a process electronically, and is a manifestation of the efficiencies that the buy-side is always looking to gain.

 

The benefits are numerous, such as reduction in errors, ensuring best execution is always met or capturing market opportunities faster but the largest by far is the trader bandwidth it frees up that can be subsequently reallocated to other activities.

 

The challenge in moving from electronic trade to an automated electronic trade is the need for the buy-side to have confidence in the automation tool they’re using, and be able to understand the logic it applies in order to execute trades.  This is why our solution is fully modular and rules-based so a firm can compose its own rules against a wide variety of variables; in essence all the market data points which are accessible via Bloomberg.

 

As buy-side firms continue looking for ways to interact with liquidity in a more efficient and productive manner they’ll look to increase their use of automation using tools like ours.

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How does a buy-side investment firm looking at automation begin to address that challenge? 

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It’s important to choose the right automation product to support the business’s trading strategy.

 

The software needs to have access to the numerous datasets a human trader would use to make decisions, and allow them to map this data to highly flexible rules that respect the nuances of the product being traded – be it FI or FX.

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The solution needs access to real time counterparty pricing information and any metadata around that price like time to quote and characteristics around firmness. It would also want to understand which dealers are axed on that position, the quality of that axe, and that dealer’s activity in general in that sector.   

Finally, the product needs to satisfy other stakeholders in the buy-side firm such as risk and compliance. It has to demonstrate that the trader is in control of the automation tool, and that he or she has visibility throughout the entire process which can also be demonstrated by a complete readable audit which shows what decisions were made and why. 

Those were our considerations in building Bloomberg’s automated tool. A key strength of our offering is the advanced customization capabilities and the quality of Bloomberg's data. Our clients can create and amend trading rules within the tool instantly, and as needed, by leveraging Bloomberg’s vast data sets. We believe this level of control addresses the biggest challenge that the buy-side has, which is understanding what the automation tool does and having sufficient flexibility to configure it to their end objectives. Our solution gives them control, adaptability and access to the very wide range of data points they need. We also provide a semi-autonomous mode within our solution, which has proven very popular with our clients, as it gives them the level of comfort, and helps them through the migration from manual through to a fully automated process.

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Centralised fixed income trading desks still have a significant role to contribute to the investment process. Can information technology enable better interaction between the trading desk and portfolio managers?

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Absolutely. Firms are always looking to increase the information flow between portfolio managers and execution traders, and technology is certainly a tool at their disposal. When a portfolio manager is considering what instruments to execute on, analytics can help give them indications of appropriate transactions to request of their execution desk. 

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For example, a portfolio manager can provide a trading desk with an indication on the sector in which to build a positon; but the trader(s) may not be able to get the price they are looking for.

 

Analytics can help the portfolio manager determine whether there is liquidity in the securities they want to sell and adjust their requested trades accordingly.

 

So, instead of looking for a perfect solution for the portfolio which has a low probability of execution, the solution that is 95% optimal but much more likely to be executed may be pursued instead. Analytics can give the buy-side indications of appropriate transactions to request their execution desks to conduct as well as counterparty performance to help with future trading decisions.
 

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Are you seeing a trend towards a separation of buy-side trading roles and skills between high touch and automated low touch trading?

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We don’t see a separation of buy-side trading roles between low touch and high touch. Low touch trades will increasingly become more automated, while high touch roles will conduct the more nuanced and bespoke trading activity with oversight of the automated low touch trades. Those high touch traders have a unique and valued skillset, which is important in ensuring they understand the rules and the management of the technology they are using to automate trades. Therefore, their skillsets are not lessening or being bifurcated, if anything they are expanding in order for them to conduct their activity in this new environment. Similarly, the skillsets of execution desks are growing as the demands on their capabilities increase when it comes to their ability to analyse data, make automation rules, and to understand the technology that underpins the automation capability.

 

Traders who are responsible for programming the automation machinery with the goal of achieving ‘zero-touch’ order execution also need to have confidence that they are meeting their firm’s best execution requirements, which is something our tool provides. It is also beneficial if the trader is savvy with Transaction Cost Analysis (TCA) technology, as we are actively talking to a number of customers who are exploring how the data in these products could be used to fuel automated pre-trade decisions such as counterparty selection.
 

 

 

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