State Street’s Charles River Development (CRD) is integrating its fixed-income order execution management system (OEMS) with start-up Wave Labs’ eLisa credit execution platform. The move is in line with a broader shift among buy-side technology providers such as heavyweights like BlackRock Aladdin and SimCorp, which are opening their technology frameworks and interoperating with a variety of third parties (in some cases, rivals) to deliver vendor optionality to the asset management community.

Over the last few years, choice has become one of the biggest unique selling propositions for buy-side technology vendors marketing to the buy side. Michael Beattie, head of the product strategy at CRD, says that although partnerships were not part of the company’s founding DNA, the vendor has changed that approach and made it central to its strategy since State Street’s acquisition of the middle office business in July 2018.

“We want to be on the side of choice here, and have tried to embrace partnerships over the past two years. We want our clients to feel like they have a choice in the vendors that they interact with,” he says.

Beattie recalls that, during his first interaction with Miles Kumaresan, founder and CEO of Wave Labs, it became clear they had a similar perspective on building fixed-income solutions. Rather than trying to retrofit an equity system to work for corporate bonds, they both thought that credit platforms should be specifically designed to meet the needs of the credit markets. The corporate bond market differs from the stock market because of the variety of bond types, which are further differentiated by characteristics like issuance date, maturity, and size.

While CRD is now more open to third-party integrations, and there are many vendors the firm could work with, there are limits to the strategic push, Beattie says. It’s not feasible to work with everyone because of timing, the workload involved, and because there can be significant competitive overlap. A big factor in choosing a partner, and what it boils down to, he says, is client demand and the value the integrated systems can offer the mutual client base.

“We’re trying to pick partners that have the biggest bang for their buck, where clients trust them as a provider, where clients have a relationship with them in some way and there’s something unique about what they do that’s helping to drive the process for us. And frankly, it’s got to be something that we aren’t planning to build or that we think we just don’t have the time to build. That’s where this fits into the picture,” Beattie says.

Beattie says that to justify working with a partner, there must be significant demand for the integration to occur. Traditionally, for CRD to move forward with a partnership, at least 10 clients of the vendor’s 300-strong roster should ask for the pairing. In this case, Beattie says there were three major CRD clients asking for connectivity to eLisa, which participated in tri-party discussions to use the platform via CRD. In addition to those three, “several others” have expressed an interest in the pairing. Neither CRD nor Wave Labs could disclose the names of the three buy-side firms due to vendor-client confidentiality, but all were managing assets north of $350 billion.

“We [been having] tri-party conversations between me, Kumaresan, and the clients. That’s been eye-opening for us, because we understand the technology and what we’re hoping this will be. When you bring a client into the mix, it does a few things: it validates our assumptions in the workflows and it ensures that there’s something real there, that someone’s going to use that system,” Beattie says.

Carving out a niche

The eLisa credit trading system is designed to help traders identify liquidity in a fragmented market, and better visualize and execute trades. Wave Labs currently connects with multiple fixed-income trading venues—including UBS BondPort, MTS, and the Ice Bonds ecosystem—to aggregate liquidity via APIs onto one single user interface. In most cases today, investment firms manage multiple venue user interfaces or call records when trading corporate bonds—typically using an OMS or via requests for quote (RFQs).

WaveLabs is also in the process of connecting eLisa to Tradeweb and other venues, as well as sell-side firms, for streaming prices and sending RFQs. According to Wave Labs, the system is designed to receive 80,000 quotes per second and process 25,000 quotes in real time.

On the trading side, the credit execution system will be plugged into CRD’s OEMS to facilitate bi-directional workflows between the portfolio managers and traders. In May, the start-up also announced its connection to IHS Markit’s thinkFolio investment management platform, and is also in talks to connect with SimCorp. The eLisa system provides four levels of pre-trade market analytics that contextualize where a bond should be trading, where it has been trading, where it is currently trading, and predictions about where it should be trading. Kumaresan says the last set of analytics, the predictive pricing data, is almost nonexistent in the market today.

“We calculate the fair value based on the conditions in the market, how other bonds are trading, and then predict where that price would be at a certain future time,” he says. “So, we are giving a trader a guide to discover where they can and should be getting the bond they are trading.”  

In its post-trade analysis analytics, the credit trading platform provides execution analysis, automated best execution documentation, and data on trading performance.  

The system uses a proprietary machine learning algorithm designed to study the behavior of the trader and provide recommended trading strategies, price settings, and smart choice trading protocols. In other sets of analytics, the credit execution system also provides broker scoring used to evaluate reliable sources of pricing information and mitigate against information leakage. The scorecard would be used to safeguard against instances where brokers spoof prices and fish for information in the market.

“We provide pre-trade information of market color and analytics that remove the noise by calculating broker scores so that the trader only sees the brokers that are reliable,” Kumaresan says.

The integration roadmap

Over the next year, the CRD and Wave Labs integration will be broken down into three parts: the initial testing and certification of the systems, ensuring they successfully operate together; the embedding of eLisa execution visualizations into CRD’s user interface; and the creation of a systematic feedback loop to improve its user experience across the two platforms.

In the last two weeks, the two vendors completed the first phase of the integration, clearing technical hurdles that include sending FIX messages to and from CRD’s OEMS and eLisa. Beattie says this is to ensure that price discovery and execution information can be carried out on eLisa and that the information is then accurately communicated back to the CRD’s OEMS.

Over the next year, as part of the second phase of the implementation, CRD and Wave Labs will work to embed aspects of eLisa’s visuals into CRD, so the two can operate as a single platform with instant updates between the CRD blotter and the credit execution system.

“What is most interesting is [eLisa’s] visualization of how the orders are executing, alert information, and so on. A lot of that framework today does exist in Charles River, but what we envision is taking pieces of that, so that you don’t have to jump between the different systems, and so that you’ve got one core platform, and you’re looking at a combination of Charles River’s order blotter with pieces of eLisa embedded into that,” Beattie says.

In the last phase of the partnership, the two vendors aim to create a feedback loop that will help them better understand how their clients are using the platforms and how to improve their user experience. The feedback loop will be informed by eLisa’s ML algos that are built to learn how traders interact with the platforms and help them to enhance their performance and automate trading functions. Beattie says the integrated systems could pull execution information from eLisa and other third parties to help inform the creation of orders in portfolio management and trading activity such as routing and knowing where to access reliable liquidity.  

“We’re headed toward providing clients with the choice that they want, understanding how they use our system—with them being part of the integration—and talking with clients. [Using this approach] we create what we call ‘client personas’ of a trader and a portfolio manager, and understanding what they’re doing with these systems is really important,” Beattie says.

The eLisa platform and the first phase of the integration will officially go live in October.