Interop tech buys time for buy-side fixed-income traders

In 1748, Benjamin Franklin supposedly originated the aphorism that has come to define modern working culture: Time is money. It is a truth that is held to be self-evident in financial services, borne out by the drive to shave milliseconds off trading times, share data across oceans, or distribute data instantly in the cloud.

And cutting time from buy-side workflows really does equal money.

In October, interop.io, a provider of container-based interoperability services for trader desktops, partnered with financial data analytics company Propellant.digital to streamline analytics for fixed-income traders. In a press release, Propellant said the partnership allowed the company to “solve the problems of fixed-income market opacity.”

It’s a lofty ambition. The fixed-income market is famously difficult to optimize, due in part to its fragmented nature, as well as limited liquidity and the reluctance of big trading firms to open up to clients.

Dwayne Middleton, global head of fixed-income trading at T. Rowe Price, has spent his career on the buy side and estimates that an average fixed-income trader spends around 15 minutes to half an hour every day moving data around in their workspace—time that could be better spent chasing alpha. He believes increased interoperability is key for fixed-income traders and portfolio managers to work more efficiently.

“I think interoperability is a key way to maximize the time in the investment process, as time is something you can’t get more of,” Middleton says. “If you think about saving half an hour across a day, a week, a month, a year—that’s just a ton of time where the portfolio manager could be doing more [of] value.”

Fixed income is not a monolith, existing as a combination of several individual, fragmented asset classes. Middleton, whose firm is in the “design stages” of implementing interop solutions, says working within these different classes is difficult because of the largely disparate workflows, the multiple applications each trader has to use to source their information, and the limited liquidity present within fixed-income trading.

“If you think of a trader’s workstation, on average they’re interacting with 15 to 20 different applications and as it stands, most people do not have an interoperable workspace,” Middleton says. “The workflow for a rates trader is very different from the workflow for a bank debt trader but we all use the same workspace. How do you take different types of data and different applications and make it the most efficient workflow possible?”

Dried-up liquidity

One major pain point for fixed-income traders is liquidity provision due to fragmented asset classes. In equities trading, smart-order routers can connect to a lot of stationary liquidity, whereas fixed-income traders’ execution management systems cannot. The gradual increase in electronification of the fixed-income market is helping solutions providers create different ways to pool liquidity, but these are not yet mainstream.

Having a full picture of the scope of liquidity ahead of making a trade is particularly important to portfolio managers and buy-side traders who need to have the best pricing information available at any time. Traders need to act fast to take advantage of liquidity pockets when they are available as there’s no constant source to rely on. A head of fixed-income trading at a European asset manager says increased interoperability can remedy this issue.

“What we see in the fixed-income market is that liquidity is fragmented, so speed matters,” they say. “We have processes that are ready to catch liquidity in a quick manner, and higher quality interoperability helps to speed up those processes.”

T. Rowe Price’s Middleton says an incomplete liquidity picture could lead to a discussion between a trader and an analyst that could take significantly longer than usual, potentially affecting clients.

“Sometimes, the liquidity picture may be so different from what the analyst was looking at that might change their opinion of the decision,” Middleton says. “That could be a half-hour conversation, so you’ve already wasted half an hour on a non-executable idea.”

Standard practice

Fixed-income traders and portfolio managers have benefited from the Financial Desktop Connectivity and Collaboration Consortium (FDC3) industry standard for desktop application interoperability, created by desktop interop provider OpenFin in 2018.

Adam Toms, CEO of OpenFin Europe, notes that some of the company’s earliest customers were in fixed income because the issues of fragmented data and disparate workflows were so prevalent. He says that despite its importance to the buy side, interoperability in fixed income is still in its infancy.

“The banks have really benefitted from FDC3, which we created, but on the buy side, they are very dependent on vendor technology, and they need those vendors to augment their technology and make use of things like interoperability to be successful,” Toms says.

He says OpenFin’s buy-side customers tend to be large asset managers as that demographic is less dependent on the vendor ecosystem, having built more of their systems internally.

OpenFin’s workspace product, like Interop.io’s offering, gives users the ability to search through every application on the desktop, as well as any end data points the user may have, for relevant information. Using FDC3, different applications can “talk” to one another, creating a standard messaging format and allowing consistent communication between individual systems.

Toms says one of the main goals for fixed-income interoperability is the ability to click on a company name in one application and have all the details for that company—sourced from other applications on the same system—appear immediately, significantly reducing the amount of time traders spend copying and pasting data across multiple windows.

“You don’t have to re-key, you don’t have to type, open the application, log in, search or remember how to use the application—these are all massive friction points,” he says. “All those steps are eradicated by using simple interoperability. That’s really powerful when you’re doing this many times a day. If you’re a trader, you’re doing this many times an hour.”

Dan Schleifer, CEO and co-founder of interop.io, says fixed income has been an interoperability adoption “hotspot” across both the buy side and the sell side. He says that while most fixed-income desks are not using interoperability yet, fixed income remains the fastest adopter of interoperability tech. He says one of the challenges in convincing heads of fixed-income trading to accept the benefits of interoperability is making them understand the cumulative value of small amounts of time saved.

“I’ll often be talking with heads of fixed-income trading, and they acknowledge that they would love for things to be faster and less onerous for their staff, but they’ll often say, ‘So what if I save my traders 20 to 30 minutes a day? I’m not going to get rid of one of my traders just because I’ve made everybody a little bit more efficient,’” Schleifer says. “It’s not about replacing people. The ROI of interoperability in fixed income is not about minutes saved, it’s about what do those minutes go toward?”

Where do we go now?

The high success rate of firms using interoperability to improve workflows is encouraging for fixed-income traders and portfolio managers, especially as the necessary changes are simple.

“A lot of this really is common sense, but people have gotten so used to clicking on different applications, and that’s why I think it’s so important. It’s a true game-changer to get these workflows more interoperable,” T. Rowe Price’s Middleton says.

Interoperability’s future in fixed income is closely linked with automation. As automation continues to modernize a largely human-driven market, interoperability will be key to optimizing the workflows of traders pursuing alpha. Fergus Keenan, chief strategy officer at Adaptive Financial Consulting, views automation as the “holy grail.”

“The key thing about the fixed-income market that makes it ripe for the solutions that interop platforms bring is the fact that it is still so human-driven,” Keenan says. “It took a long time for people to break out from the mentality of, ‘This application does this, so I do that in there, and then I copy and paste data into the next application,’ to really start thinking about the process and the workflow. The explosion of electronification has led to the need for workflow optimization, and then the holy grail is automation.”

Despite the optimism around interop in fixed income, some say it can’t fix an unfixable situation. The head of fixed-income trading at a European asset manager says that the significant fragmentation within fixed income poses long-term problems for the market.

“The fixed-income market has a natural liquidity limit, and a natural standardization limit, so I see this positive momentum continuing. But I think it’s fair to say that compared to the equity market, we will never reach a situation like we see there—in terms of standardization and market transparency—in fixed income,” they say.