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Smarter trading decisions in fixed income

Alexandre Hardouin
Alexandre Hardouin
Director, Fixed Income Desktop, London Stock Exchange Group
Vuk Magdelinic
Vuk Magdelinic
CEO at Overbond

In September 2020, Refinitiv announced it was boosting its fixed income analytics trading capabilities with Overbond pricing data. We spoke to Vuk Magdelinic, CEO of Overbond, and Alexandre Hardouin, Head of Rates at Refinitiv, about how the new partnership can help traders make smarter trading decisions.

  1. Accurate bond pricing sources is one of the biggest challenges for fixed income traders today. Part of the problem is that traders only have access to a small part of the available data.
  2. Trusted data is the lifeblood of the fixed income trading desk. Having the right tools to make sense of the data is also important.
  3. AI and automation are becoming increasingly popular among both the buy- and sell-side to price bonds during live trading.

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What are the biggest challenges facing fixed income traders today?

Vuk Magdelinic, Overbond CEO (VM): The biggest challenges in fixed income trading are the need for accurate bond pricing sources, aggregation of the fragmented data, and modeling to get a deeper view of illiquidity across venues and those different input data sources.

Currently, there’s a lack of reliable data to guide accurate bond pricing and build credit curves.

Traders often have access to only a fraction of data available. The bond market relies heavily on segregated data disseminated between counterparties. This creates fragmented data sets that do not cover the bulk of over-the-counter (OTC) traded flows.

In addition, FINRA Trace and other OTC regulatory mandated trade reporting repositories, outside of the U.S. dollar denominated market, suffer from reporting lags.

Illiquidity makes it more difficult to trade bonds. Most of the existing fixed income data sources do not have enough coverage to provide traders with a view of true liquidity.

Traders require accurate bond pricing and liquidity tiering per ISIN/CUSIP, so they can measure the liquidity of individual securities and enable automatic execution.

Refinitiv Eikon: Turbocharge your analysis of the financial markets with the ultimate set of tools

Alexandre Hardouin, Head of Rates at Refinitiv (AH): Trusted data is the lifeblood of the fixed income trading desk. Traders also need the right tools to make sense of vast quantities of incoming information if they are to make sound decisions with accuracy, speed and precision.

Refinitiv’s unique data sets — such as Tradeweb bond and swap data covering more than 24,000 unique bonds; MarketAxess corporate bond data covering 35,000 instruments and 90 percent of liquid corporates; Interdealer broker rates and money market data, exclusive loan data from Loan Pricing Corporation; exclusive bond holding data from eMaxx, and so on — combined with unique Overbond data for illiquid papers and impressive coverage of credit curves will help traders face today’s challenges.

Watch: Transforming your trading with AI-driven bond pricing

A Refinitiv/Greenwich Associates survey says that 80 percent of market professionals expect AI to be fully integrated within trading in three to five years. What are you seeing from your fixed income customers today?

VM: Both sell-side dealers and buy-side asset managers are increasingly relying on AI applications to price bonds in live trading.

These counterparties are also increasingly adopting quantitative investing and liquidity risk-monitoring techniques to automate their trading workflows. This includes the consumption of increasing amounts of alternative data and using new methods of fixed income pricing analysis, such as AI analytics like Overbond’s COBI-Pricing LIVE algorithm.

After working with both European and North American trading desks, we are seeing that a desk size of about two credit trades, with coverage mostly in mid-investment grade corporate bonds, that on a sell-side receives on average 500 request for quotes (RFQs) a day and can respond to around 100 to 150, utilizing an AI model like this can increase the RFQ response rate by 100 percent.

As a result, trading desks can respond to 200 to 250 RFQs a day.

Now, it is not just about speed. It is also about precision. A model like COBI-Pricing can enable a desk to grow its flow and at the same time preserve a hit ratio of about 10-15 percent of all RFQs won, and an optimal margin through a margin optimization model that will guarantee a positive desk P&L.

AH: Refinitiv’s exclusive StarMine Credit and Sovereign Risk models based on complementary sources of data and analytical methods allows traders to quantitatively assess and predict credit risk. Combined with Overbond AI Analytics to measure liquidity, it offers a unique combination of AI-driven tools to help fixed income traders and investment managers make the right decisions even on illiquid companies.

Tell us about the Overbond and Refinitiv partnership and how it will benefit fixed income traders.

VM: This partnership is about enhancing the tools that traders have at their disposal to assist them in making more informed trading decisions, faster and with more precision.

The side-by-side integration of Overbond’s COBI-Pricing model and Refinitiv’s Eikon API enables traders to quickly and efficiently price large numbers of liquid and illiquid fixed income securities.

This combination provides traders with an automated bond pricing workflow with AI-modeled bond prices and best executable issuer curve visualization.

COBI-Pricing helps sell-side traders using Eikon respond to more RFQs, and buy-side traders to effectively measure the pre-trade cost of execution. COBI-Pricing also has the capacity to process real-time historical pricing data on coverage of over 30,000 bonds, with a refresh rate of under three seconds, making it the fastest in the industry to date.

The Overbond platform sources raw live trading and fundamental data from a range of suppliers including Refinitiv. It also collates company-level fundamental data, dealer quotations, and/or internal client-executed trade records and investor preferences through feedback.

Using novel AI liquidity scoring, COBI-Pricing tiers all trades and determines if these qualify for full-automation, trader supervision, or should not be traded at the current time.

The enhanced trading workflow that Eikon and Overbond side-by-side integration brings will enable many sell-side, buy-side or issuer treasury desks to efficiently monitor fixed income secondary market prices and execute trades.

Overbond’s COBI-Pricing model and Refinitiv’s Eikon API
The integration of Refinitiv’s Eikon API and Overbond’s COBI-Pricing model

AH: In the past few years, Refinitiv has developed and refined a set of innovative tools in the Eikon desktop. As traders strive to access quality data and trusted news sources (Reuters News and IFR markets), our solutions help traders make sense of this data with powerful analytics to improve their efficiency and ultimately make better decisions.

Providing side-by-side workflows with Overbond will help the user interact smoothly with the two solutions. Eikon is built on open platform technology, and partnering with innovative companies such as Overbond allows users to get the best of both solutions.

What does the future of fixed income trading look like in your view?

VM: I think the AI technology aggregating data will be improved. AI modeling techniques will be able to process various data types in fixed income, resulting in more automation and further streamlining of trading workflows.

Technological solutions will continue to digitize the trading process.

Look out for increasing use of algorithms, AI models, and server-less cloud technology enabling ever faster processing times.

AI is a very powerful tool when it comes to aggregation of disparate data types and enabling learning on historical and real-time trading patterns and correlations. It helps traders execute significantly more RFQs with an optimal hit ratio, achieve best execution across multiple venues, and/or trade illiquid securities with confidence.

Fully cloud-enabled visualization will also be increasingly simple to use so that modeled output for trades is easy to access, intuitive to understand, and can extend to no-touch automation. I think this will be growing significantly in the coming years.

In my opinion, data sources will become much more integrated.

This will be driven by API deployment because data can be fed into any internal system. This could lead to the doubling or tripling of response volumes.

The OTC or disparate data nature of the market through regulatory post-trade depositories may also be solved, although we are still some way off before these data sources can be consumed on trading desks in real-time with the precision required for full automation.

Watch: Vuk Magdelinic is interviewed by Trader TV

AH: As the availability of data in the fixed income space continues to grow, market players should continually evaluate the universe of new tools and solutions that are available to support and simplify decision-making.

More information can deliver many benefits, including enhanced transparency, but not without attendant challenges. Innovative thinking and new solutions, however, can cut through complexity.

To this end, Refinitiv remains committed to the open sharing of quality data, partnering with innovative firms such as Overbond and to supporting the ongoing transformation of the fixed income market to the benefit of all stakeholders.

Refinitiv Eikon: Turbocharge your analysis of the financial markets with the ultimate set of tools

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