The Problem of Information Leakage in Fixed Income

The Problem of Information Leakage in Fixed Income

[Fixed Income Market, liquidity, Fixed Income Technology, information leakage]
Sep 5, 2017 10:00:00 AM
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David Askin

The Challenge of Lost Information in a World of Plenty

Generally, when market participants talk about information leakage, they mean giving up sensitive information to the market that hurts their ability to find liquidity.  The concern is that each successive external counterparty they expose to an intended trade increasingly diminishes their chances either of doing the trade or of doing it without negatively impacting the desired price.  

However, there is another more pervasive and damaging type of information leakage in fixed income, that is potentially the underlying root cause --   the suboptimal use of valuable data within an organization (Learn more HERE).   It can take the form of information that simply is lost, as well as information that is received but not shared so that the full value of the data is not realized.  It is a problem for the initial receiver of the data (sales people in this case) and as well for their colleagues who also would benefit from having it.

Information leakage also is a problem for trading and sales management.  These executives are charged with maintaining and/or increasing market share and profitability in what is an increasingly resource-constrained environment. 

The legacy tools at their disposal often are inadequate to achieve these goals.  For example, accurately gauging how well sales people cover specific accounts, measuring the quality, quantity and speed of execution against dealer axes, and minimizing lost opportunities is difficult, if not impossible without access to the requisite data and the associated analytics.  This also makes it difficult to establish meaningful metrics that motivate the appropriate behaviors within the organization and thereby to achieve business objectives.

...difficult to establish meaningful metrics that motivate the appropriate behaviors within the organization...

Fixed income sales people are typically assigned to cover dozens of accounts.  Successful ones are expected to know their clients.  This means knowing what they own, understanding their strategies in terms of the types of bonds they want/need to buy or sell, locating appropriate securities that meet their criteria and working with their own traders to facilitate good execution. 

In the face of dynamic markets, an explosion in of information available and increased regulatory requirements, it is impossible for an individual sales person or even a sales coverage team to do this well for each assigned account.  This is true, even when they are provided the usual variety of tools such as informational/analytics terminals, mountains of unstructured messages and chats, bid lists, dealer axes, spread sheets, etc.

The result is scores of missed trades.  Moreover, it also motivates some to keep to themselves the valuable nuggets of information they do manage to find regarding holdings, strategies, relative value and the availability of tradable securities.  In some cases, this behavior is driven by the desire to beat colleagues to the punch in favor of their own customers.  In others, it is a matter of lacking the necessary means to collect, input, store and disseminate the information easily.  Regardless, the result is the same – lost information, missed trades, lower revenues, inefficient operating procedures and ultimately an increased likelihood of client dissatisfaction.


Markets in Transition

Over the last decade, the fixed income market has transitioned from one usually characterized by lack of transparency and an information advantage favor of the sellside over the buyside, to one where information is widely available.  Technology is the major driver of this transformation, as aided and abetted by a regulatory regime which demands increased transparency both for pre- and post-trade operations.

Among other things, the result is a more competitive trading environment.  Most participants are scrambling to double down on their legacy competitive advantage, as a means of maintaining and/or growing profits.  For some, this is their only means of survival.

Merely relying on reputation or pedigree are not enough to assure survival.  Firms now recognize the need to deploy technology more effectively, as a means of obtaining value from the vast amounts of information at their fingertips and improving operational efficiency.  Others believe they can rely on client relationships.  The best fixed income shops are those that excel at both.


The Solution:  Good Technology

For dealers, there are always internal tensions centering around determining who “owns” the client -- the firm or the sales coverage.  Our view is that by deploying good technology intelligently, dealers can have the best of both worlds and render the argument moot.

Platforms now exist that enable valuable market data and other information that facilitates execution against clients’ strategies to be centralized and shared internally across dealers’ desks.  In doing so, information leakage in fixed income is reduced.  Fewer trades are missed.  Such solutions can also enable traders to execute in larger blocks which are then parsed into smaller pieces across clients executing similar strategies.  Efficiencies are achieved.

The best platforms excel in delivering value by offering multiple functions in a unified way.  Among these functions are message parsing, filtering, matching, customized alerts, connecting to ATSs and integrating with internal and 3rd-party systems.  They aggregate, store and enable the dissemination of all relevant data.  This facilitates higher internal adoption rates, increased teamwork and a rationalization of time and money spent.  They also eliminate the clutter, inefficiency and added expense of building or buying many overlapping products.



As the fixed income markets have evolved, the ability to harness all available information efficiently and to deploy it effectively across client segments and asset classes is no longer a nice to have; rather it is a need to have for firms.  Those that fail to adapt and adopt this approach are unlikely to thrive.  They might not survive.  The intelligent use of technologies that fit the underlying data, as well as the people and businesses that need to utilize them is essential.  Solutions exist to limit, if not eliminate information leakage in fixed income but you need to look.

Technology can solve the problem, but should you buy a product that is already on the market or build a customized tool inhouse?

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