Being that next Monday is Labor Day in the US, and yesterday was a bank holiday in England, we’re going to keep this Tuesday column trend going a bit longer. (A “bank” holiday…as though the banks have bequeathed a day off to their lowly servants…in THIS country, we give our holidays proper names—like Labor Day, damnit!)
Anyway, let’s get to it.
Emerging tech, interoperability & fixed income
I recently wrote about how the fixed-income industry needs more projects that are built around interoperability, rather than Big Bang-type consortium projects. I’d like to expand on that.
Even though innovation and automation have helped propel fixed-income trading forward, it’s still a hodgepodge strategies, tools, and venues. As noted in this recent article by our Nyela Graham, fixed income still relies upon a combination of phone calls, chat messages, and interpersonal relationships, despite the introduction of new electronic protocols for bond trading, such as request-for-quote (RFQ), used by Tradeweb and Bloomberg; central limit order book, used by CME BrokerTec; and all-to-all, used by MarketAxess.
A while back I spoke with Vuk Magdelinic, CEO of Overbond. His company specializes in fixed-income data aggregation and AI algorithms for bond pricing, trade workflow automation, pre-trade signals and market surveillance. From Magdelinic’s point of view, the interop push in fixed income we’re seeing is thanks to recent developments in cloud and AI.
AI is the key that could unlock the puzzle of market fragmentation, where it’s possible for one company to have dozens or even hundreds of different bonds. The complexity that fragmentation creates, when compared to equities or foreign exchange, has implications both for alpha generation and risk management. AI—and more precisely, machine learning—is vital to finding correlations in a sea of information. And you need cloud to provide the computing power to process terabytes of data. So when combined, they help break up data bottlenecks, correlate signals, and weight values exponentially faster than in the case of a single quant sifting through a pile of disparate, unstructured data.
Cloud and AI are not “new” technologies by any means, but their combination and what you can do with them in concert is evolving—rapidly. For example, Magdelinic points to Overbond’s partnership with Amazon Web Services, in which Overbond has developed a new bond pricing engine that utilizes the latest data processing server-less architecture from AWS. To help with the deduping and real-time aggregation of data, Overbond is using an AI tool that was rolled out by AWS in 2019.
“Without these technological breakthroughs—interop, AI, cloud—it’s not scalable; it’s not feasible. Overbond wouldn’t have been able to be a profitable company with that approach four years ago. But now, we have the setup where we can go from one bank to another and repeat the work in an efficient way,” he says.
The combination of cloud and AI help break down the long-standing Chinese walls inside firms, which have historically prevented dealers from sharing data internally or mixing proprietary data with external data. Because cloud and AI are allowing firms perform these functions, we arrive at the next step: enabling them at scale. If you want more data to be stored in the cloud and to run ML models on, you need to lean into interop.
“Those are the three ingredients that are bringing new tech in fixed income to life,” Magdelinic says. “And the benefit is you don’t have that human bottleneck anymore because you can do 30-35% of everything that comes through now no-touch, automatically. You can do another 20-30% with one click. And that pretty much doubles the amount of time you have for all these other ones that need an adjustment—so now we have more time to address those issues.”
The combination of existing technologies are now driving innovation throughout the industry, rather than brand new iterations. While quantum computing might prove to be a quantum leap—in however many years—some simple blending is all that’s needed to yield progress in fixed income today.
So allow me to take a potentially quantum leap in logic: Big Tech companies will prove most vital to the future automation efforts in fixed income. Over the past few years I’ve written extensively about how I think app interop has been the most important advancement in the world of fintech, but the coming years will be marked by Big Tech’s spread into the capital markets. Tech giants may even prove to be an existential threat to some of the biggest market data vendors.
To varying degrees, Amazon, Google, Microsoft, and IBM are at the center of both cloud and AI development and advancement. They are also leaders in the world of cybersecurity, which is a growing concern for financial institutions and regulators, alike. And as these Big Tech companies take on greater importance, regulators are taking aim at those same companies.
If Amazon, Google, Microsoft, and IBM want to make inroads into the day-to-day operations of trading firms, fixed income would be a great place to quickly grow. Again, this is a fragmented market that is still behind the innovation curve when compared to other major asset classes. AI needs lots of data, which requires cloud storage and compute power—which these guys have in spades. Finally, cybersecurity is only going to take on greater importance, and those four companies have the budgets to innovate and—if it’s even possible—stay ahead of the hackers.
I suppose this is all to say that CIOs, CTOs, and CISOs need to start having serious internal conversations about how Big Tech is going to disrupt the world of trading—both in ways that are good, and potentially in bad, monopolistic ways.
It wasn’t that long ago that public cloud was anathema to Wall Street. Microsoft was all about Excel and Word. Google was a search engine. IBM was (and still is) a hardware heavyweight. Amazon was an online department store. Slowly but surely, these companies have become integral to Wall Street. If you don’t think they’re hungry for more of that Wall Street pie, you’re crazy.
Think I’m crazy? Let me know: anthony.malakian@infopro-digital.com
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