“We’ll have to put in for a bigger budget,” said one senior fixed income trader, after seeing a demo of AXA Investment Manager’s pricing data tool.
Presented at the Europe Fixed Income Leader’s event on 10 November 2016 by Yann Couellan,head of trading at AXA IM, the home-grown system was built around a store of market data going back to 2007.
AXA has spent a considerable amount of money to develop a suite of applications that effectively stream prices from banks, giving it a real-time view of the market with historical data that the firm has used, including captured quotes from banks.
It is not alone in making such an investment. AllianceBernstein [AB] built its pre-trade ALFA platform to effectively scrub data in order to support pre-trade decision making and it has made a quantifiable difference. The firm’s head of credit trading, Jim Switzer, told the 2016 US Fixed Income Leaders on 9 June 2016 that as a result of the system, “We can trade when we want, and not when we have to.”
Other investment firms, including Union Investment and Pictet Asset Management are also known to have similar projects underway. Putting the trading desk in the driving seat for pre-trade price and liquidity formation is not cheap but it is increasingly necessary. Pressure to report both performance and pre-trade decision-making to end investors and regulators is increasing the need for quantifiable information around the trade lifecycle. Equally the use of all-to-all trading will require the buy side to make prices more frequently.
“We do expect growth of the all-to-all model – which is why we launched our own offering – and when you are making a price, you need to know where the market is,” says Simon Maisey, managing director for Finance and Business Development at Tradeweb. “There is certainly a trend, fuelled by the rise of cross-asset execution desks, of centralising infrastructure.”
By centralising this information, buy-side desks can build up a picture of the market that can be used to support all of their traders. It supports or even replaces the picture that had historically been provided by dealers, giving an objective perspective on execution quality. A combination of reduced headcount and liquidity provision mean that an important feedback loop that buy-side traders relied upon has been weakened. That has highlighted an information gap that investment managers face, and at a point where transparency is paramount.
“It’s driven in part by the regulatory change,” says Marion Leslie, head of Thomson Reuters’ Enterprise Propositions. “For example when Solvency II came up for insurers, they were not at all used to having to understand the underlying data that underpins their investment. Now, with MiFID II the buy side needs to produce many trade reports, there is going to be a whole explosion of data available that they have never needed to think about before, and services from the sell side are not necessarily available.”
While this puts the ball firmly in the court of the investment manager, there is a disparity between the approach that some of the more advanced firms are taking towards data management and the wider buy-side community.
“Towards the back end of last year we did a survey and perhaps unsurprisingly 95 per cent of financial institutions felt that significant benefit could be gained from a harmonised approach to data management for multiple regulations, but only 12 per cent of those respondents felt that they had a strategic approach,” Leslie says.