Banks that once prided themselves on cutting-edge in-house systems are partnering with technology specialists to gain an edge in fixed income trading, as reshaping legacy architecture for a new, largely electronic market structure becomes prohibitively costly.
Sweeping MiFID II reforms are set to drive more over-the-counter instruments including bonds and derivatives onto electronic venues from January 3, mirroring regulatory shifts that have already taken place in the US. That is driving demand for next-generation trading technologies that analyse vast swathes of data in real time for improved decision-making and faster execution.
In ultra-liquid Treasury markets, some dealers have joined forces with electronic marketmakers that used superior technology to muscle their way in. BNP Paribas recently teamed up with GTS, while JP Morgan last year signed a technology agreement with Virtu.
Barclays, a pioneer in fixed income electronic trading through its BARX platform, recently cited technology as one of four core areas for investment to regain an edge in its markets business. The bank partnered with Broadway Technology for a new global rates trading platform that executed its first US dollar interest rate swaps trades in August. Euro swaps were added last month.
“It has always been important in our business for technology to remain almost exclusively in-house but one area where there was an opportunity for us to consider a partnership was connectivity,” said John O’Callaghan, global head of rates eTrading at Barclays. “The right connectivity partnership helps to improve our time to market and customer experience.”
The decision to partner reflects Dodd-Frank and MiFID II trading rules that triggered a proliferation of fixed income trading platforms.
“With new venues and protocols springing up, connectivity becomes an area where you can spend a large percentage of your wallet,” said O’Callaghan. “We wanted to make sure that we were focused on our business logic, which is offering great service and great prices to our clients.”
Barclays is one of three large dealers to sign up to Broadway’s expanded global fixed income infrastructure, which connects to multiple platforms and exchanges, providing detailed analytics on client trading activities for more efficient execution.
“Banks have to deliver a reduction in costs, better provision of service to clients and regulators, and better business intelligence,” said Tyler Moeller, CEO and co-founder of Broadway Technology. “The reason they’re now buying technology is that they can increase their competitive edge, but with a dramatic reduction in costs.”
The modular system, built around the firm’s TOC middleware, enables banks to focus development efforts on individual pricing strategies. Barclays is eyeing a competitive edge in interest rate swap packages, and completed a £2.6bn deal for a client in October. Barclays CEO Jes Staley told analysts at the bank’s Q3 results presentation that the client deemed the trade “the quickest on the Street”.
Around 20 firms are using Broadway’s FX and fixed income infrastructure, including global players that are protecting market share and regional banks that are embracing technology to capture niche market opportunities.
“MiFID II is a catalyst as it forces banks to change their systems and consolidate across asset classes and regions,” said Moeller. “The full system shifts we’ve seen are just the tip of the iceberg as we’ll see a wave of reinvestment from those that opted for temporary fixes while they figure out what to do next.”
JP Morgan’s approach to partnerships sees the dealer work alongside fintech hopefuls that can help to address market pain-points through its In Residence programme. In October, the bank signed a multi-year agreement with Mosaic Smart Data - the first graduate of the programme.
Mosaic will provide trading analytics software that JP Morgan hopes will shore up profitability in its fixed income trading division.
“We’re turning raw data into executable information and making it useful for our sales people so we can service our clients in a more efficient manner and bring additional value to them,” said Oliver Harris, head of the In Residence programme at the bank.
Starting in Treasuries, and with ambitions to broaden the service across cash and derivatives, the software consolidates voice and electronic data, providing analytics on historic trading and predicted trading patterns. The terms of the deal allow Mosaic to offer services to rival banks using their own data.
“There’s no exclusivity, as we believe in solving industry problems. The unique value to us is in the combination of our own data and the analytics that Mosaic can provide on top of that,” said Harris.