Wednesday, May 30, 2007

Algorithmic Trading Challenges Content Services in Fixed Income

Advanced Trading notes how the introduction of more automated quotes and trading interfaces from the New York Stock Exchange for bonds and other fixed income securities and more widely available fixed income pricing from NASDAQ's TRACE service are helping to drive a more algorithm-driven fixewd income marketplace. This premise is a stretch at best in terms of the current reality: NYSE supports trading for only the most liquid corporate bonds, leaving private markets to find their own buyers and sellers through more conventional channels for the vast ocean of debt beyond NYSE's trading operations. But it's fair to say that the sophistication of pre-trade evaluation tools for fixed income analysts and portfolio managers outstrips the ability of people using those tools to execute on their analysis effectively.

With such low liquidity in most fixed income markets it's not likely that improved trade execution channels alone are going to be enough to drive demand to the point where we'll see the kind of sub-microsecond automated algorithmic trading opportunities that we see in equities markets any time soon. But the levels afforded by improving execution technologies appear to be rising to the point that there are new opportunities appearing for decision support services. Most of these opportunities, though, are not likely to form around typical desktop technologies or back-office trading systems.

Instead what we're likely to see are systems that allow participants in the fixed income marketplace to quantify more effectively "soft" marketplace factors such as market sentiment and likely ratings changes. These factors are important in equities markets as well but in the more leisurely world of fixed income markets they have the ability to impact actual execution factors through human analysis far more effectively. We'll be hearing more about how automated trading systems are going to "revolutionize" debt markets but expect the real revolution to come in pre-trade support services that enable niche markets to understand the human-influenced trading landscape.
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