The evolution of the fixed-income market over the past decade in many ways has been mirrored by advancements in technology. Throughout my time in technology development and deployment, I’ve seen firsthand how changes in the electronic bond market caused technology companies to respond with innovative solutions to tackle new challenges. Today technology is helping steer the entire financial industry towards greater efficiency and profitability.
Bond trading used to be far from instantaneous. The cycle started with a salesperson, going to a trader and then back. These communications were often facilitated with a phone, fax machine, or perhaps Bloomberg Messenger. A buy-side employee might receive a long list of bonds in the morning, spend the day mulling over which ones to purchase, and call back a salesperson at 3 p.m. with an order. It was a tedious process.
Starting in the early 2000s, technology firms began to look at ways the bond-buying process could be made more efficient. Risk management failed to keep up with rising assets under management, which then contributed to the sharp financial crisis of 2007 and 2008. The Volcker Rule restricted banks with assets in the United States from making proprietary investments, mainly corporate bonds. This left banks with a decreased incentive to maintain a large inventory of bonds, shrinking inventory across the market. Trading volume fell and matching large-block trades became harder.
The electronic platforms developed in the early-to-mid 2000s worked fine in times when markets were normal, but were inappropriate for these new, volatile times. With so many sellers in the market, it would be counterproductive to tell so many people that you are looking to offload inventory. The existing electronic platforms were not effective for large block trading.
A new type of technology was needed to solve these new problems. In 2012 I co-founded Algomi with a team of talented individuals from UBS and other leading companies. We wanted to create a company to enable banks to create real-time social collaborations internally and with end investors that identify the best trade opportunities.
What we at Algomi realised was that one of the main causes of illiquidity existed inside of the banks themselves. Despite all of the market evolution of the past two decades, many people still kept track of trades and missed trades on notebooks or Excel spreadsheets. Information wasn’t shared across a company. We go in to the investment banks and digitise the franchise data in a trading environment. Using this information, we identify the right people inside an organisation to connect buyers and sellers, based on sophisticated analysis of people’s trading histories, current positions and many other pieces of data. This “bond information network” helps build connections in large, illiquid transactions.
Our technology connects every salesperson in an organisation so they pool their information and make better trades. We now have plugged the buy-side into this system, so they can see the evolving nature of liquidity at sell-side institutions. We have created a complete fixed income trading ecosystem, increasing the velocity in large and illiquid voice trades between banks and institutional investors.
The first half of the year has brought a series of seemingly disconnected, confused signals about the global economy. Will the Euro or the Chinese stock market drag down world growth? Will a new set of emerging markets rise as new leaders? Can the United States successfully navigate its first rate hike in nearly a decade? No matter what way the market turns, better information and technology will be the pivotal way that buyers and sellers connect quickly and accurately.
By Usman Khan, Co-founder, Algomi