The bond market’s broadband moment is around the corner.
I remember the giddiness of plugging in my first cable modem in 7th grade. The 5 steps of connecting via AOL (cue the nostalgic cacophony) became a blink – and the experience of using the internet was forever changed, eliminating the tyranny of the hourglass cursor after every click. The ability to surf the web through richer content wasn’t incremental – it was a game changer.
Technology continues to transform consumer and business processes, including investing. Yet some areas of the bond market remain exposed to dial-up modem style interactions, creating bottlenecks for platforms built for modern flows (think APIs vs faxes). One area that sticks out most in our world is the RFQ (Request for Quote) process.
RFQ is a point in time auction for clients to solicit prices to trade. RFQs remain prevalent in fixed income, and are used almost exclusively in selling muni bonds. Unlike the world of stocks or other liquid bond markets, the muni world has a quirk where there is basically only a one-sided market of observable offers – that is, prices to buy, not sell. For there to be bid side coverage, dealers would need to post prices to buy 1M+ securities – an expensive computational task that also creates untenable market exposure, as a counterparty could hypothetically execute against all bids simultaneously. There is no ability to short munis, throwing a major wrench into conventional ways dealers can manage risk. Consequently, clients can access a wide set of offers (typically 100k+ available to buy), but only a small percentage have bids (single digits), forcing sellers to use RFQs to solicit prices.
In other markets, the orderbook overtook RFQs (‘upstairs trading’) thanks to superior features like pre-trade transparency, continuous execution, ability to automate, and reduced information leakage. Despite these advantages, the orderbook has struggled to unseat RFQs in bonds due to the challenges of aggregating comparable liquidity all the time. As a result, RFQ style processes remain embedded in bond land, fueling a daily rhythm of requests, waiting, responses, negotiations and executions across the sellside, brokers, and buyside.
A growing wave of dealers with algos are now able to price bonds instantly, but they are participating in processes designed to accommodate human response times. Fast dealers are wedged into elongated workflows where they must wait for client reactions to their prices, creating undesirable exposures. Clients are forced to spend precious time waiting for these processes to play out. Many are reluctant to invest in ‘live markets’ infrastructure to trade via an orderbook, given the comfort of the status quo. Fast web servers aren’t useful if the client experience is designed for dial-up connectivity!
Amazon 1999 vs 2019 – 20 years later high speed isn’t just faster, it fundamentally redefines the experience
What if there were a way to combine the advantages of orderbook trading with the aggregation spurred by RFQs? If executable liquidity could emerge instantly without a request process? What could a portfolio manager achieve if the market had superior pre-trade transparency?
We’re about to introduce a novel way to automate liquidity access at the moment it’s needed. Whether you’re an asset manager looking to streamline rebalancing, a trader seeking programmatic access to firm liquidity, or a retail brokerage seeking a modern muni experience, our new protocol seamlessly surfaces automated liquidity to enhance the client experience.
Stay tuned. We’re taking aim at the tyranny of the hour glass – unlocking the speed and precision you’ve been waiting for.