Fixed Income Trading - Alpha in Execution

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The traditional relationship between the buy and sell side in fixed income as an asset class is being redefined by subtle shifts in market eco-structure due to recent regulatory change, declining use of bank balance sheet and an increased reliance on technology.

Increased automation within the execution process will facilitate a shift in ownership of trading information to the buy-side enabling traders to uncover new sources of latent liquidity, the more execution will become a valued partner in the investment process.

The unique liquidity challenges fixed income markets face are in fact conducive to increased electronic trading given the ability to efficiently aggregate liquidity from hundreds of asset managers and sell-side firms. Empowering a dealing desk’s ability to source liquidity through the improved use of technology, data aggregation and enhanced analysis enables firms to maximise the opportunity to improve alpha and enhance fund performance.

However, widespread industry frustration remains at the perceived lack of data quality available today and the need to allocate valuable resources to clean up datasets before they can be used to derive real value.  There are also growing discrepancies in the ability to access data based on the size of firm and the type of flow. Passive index funds trading more liquid instruments have a deeper pool of accurate data with which to base their pre-trade execution strategies, whereas active managers trading illiquid emerging market (EM) bonds for example, still have limited information. This is leading respondents to turn to internal as well as external data aggregation, facilitating a need for investment in not only technology but also in upskilling the dealing desk.

In this changing environment, the trading desk will need to upskill and adjust. The muscle memory of traders now needs to be challenged to adapt to the necessary multi-layered information strategies to make smarter execution decisions, ultimately raising the role of the buy-side trader to a key partner in the implementation of the investment strategy.


Rebecca Healey, Head of Market Structure & Strategy, EMEA

Ellen Gordon