Fixed Income special report

Click here to download the PDF

Bonds Automation is About Quality, Not Speed

If you look up "bond" in a dictionary, the first definition refers to restraints designed to hold someone prisoner. The second describes a "binding" covenant, with the explanation of fixed income instruments some way down the list. But it's worth keeping these definitions in mind: Fixed income assets were never designed to be traded in a high-frequency environment-they were intended to be held in return for agreed payouts over time-but are now undergoing an automation revolution.

High-frequency bond markets may still be some way off, even if more attention is now typically paid to a bond's price than its yield. But that isn't stopping firms wanting to apply more automated models to the most liquid classes of bonds. Automating basic trade flow saves money, allows firms to focus on more complex deals, supports the growth of higher-frequency trading and enables firms to offload data intensive and time-sensitive strategies to machines that can execute trades faster.

As complex bond pricing becomes more automated, compute power demand intensifies, while for the most liquid classes, reducing latency to the execution venue becomes more important. That's where datacenter providers like Equinix come in, providing the space and connectivity for trading firms, and often hosting the matching engines of the marketplaces themselves. In fact, as fixed income moves more to an exchange-like, centrally-cleared order book model, these datacenters will become the key meeting places for traders, replacing the handshake, phone call, or electronic request-for-quote model.

These more transparent, exchange-like marketplaces will by their nature generate better quality market data. But the need for more transparent, frequent and better-quality fixed income pricing is ubiquitous. Whether you trade once a day or multiple times a second, knowing that the price you are trading on s timely, accurate and executable is key, so that the pre-crisis gaps between valuations and reality are never repeated.

Of course, the fixed income markets include a range of unique features and complexities. One such additional complexity is the attribution process, which requires that firms have a firm grasp of all relevant data points, and implement the correct processes and technology platforms, as outlined by Christophe Volard of BI-SAM later in this report. And as the fixed income markets inexorably move towards a model of increased automation, these systems choices will become more important to a firm's success in this evolving electronic landscape.

Click here to download the PDF