The fixed income market is huge (approaching $100 trillion) but it doesn’t have the liquidity and transparency of the Currency markets and is very different than the equity markets. Three key facts help to understand this massive market:
– Only 1.5% of outstanding bonds actually trade every day.
– Very few bonds trade electronically and most trades are done via voice trading or some hybrid way.
– Bond issuance has increased during this extended low-interest era, aka ZIRP (Zero Interest Rate Policies).
The market structure today has changed following the financial crisis of 2008 and 2009 and the subsequent introduction of new regulatory requirements. The sell-side (broker-dealers) no longer have the balance sheet to take on a lot of risk by warehousing bonds. Their market making and distribution capabilities have been impaired since the financial crisis.
In other words, this $100 trillion market is facing disruption from both digitization and regulation.
Some of the above need for change has been addressed by introducing “alternative” Fixed Income trading platforms, either electronic or hybrid (e.g. OpenBondX). But most of these alternative platforms focus on offering a service to trading counter-parties away from the broker-dealers. In other words, they believe in disintermediation and offer electronic platforms for trading less liquid bonds.
Algomi on the other hand, aims to improve the efficiency of dealer’s distribution capabilities for trading less liquid corporate, high-grade, high-yield, and emerging market bonds without disturbing their intermediation function. The company’s product, Honeycomb, digitizes dealer firms’ internal sales and trading data, including trade histories and missed trades, and aims to enhance their distribution capabilities.
Algomi, is also catering to the buy-side of the fixed income market. Honeycomb allows sell-side firms to make relevant information available to their buy-side clients without jeopardizing the clients’ natural tendency to be secretive about size and price.
The fixed income trading landscape consists of big data sets of financial instruments (many issuers, many yield curves, different issue dates, different outstanding sizes, etc). Most securities are OTC (Over The Counter) and traded via an RFQ (request-for-quote) system. Fixed income securities trade less and less as they “age” (i.e. they are most active in the first weeks of issuance), making it difficult to find who is holding these older bonds. Buy-side firms may need to trade odd lots, or very large size; this creates a problem of potentially spooking the market by simply putting an intention out there. Buy-side needs hard and soft information (actual trades, missed trades) to get a feel of a two-sided market. Buy-side is challenged by parsing thousands of messages on Bloomberg chat, to get color and be able to trade. At the same time, the buy-side doesn’t want complete transparency (revealing their buying intentions and actions could move the market in ways that are not in their interests).
Algomi is working inside the parameters listed above – not outside this box. Algomi is not an alternative trading system. It is a Sales & Trading tool that spots inefficiencies, combats illiquidity, provides market color, markets and alerts. Their objective is enhance sell and buy-side relationships by effective sharing of information.
Fixed Income is a global market and Algomi is starting to compete on the global stage. Algomi, which is based in the UK, is establishing their presence in the US (which is the most transparent fixed income market), and in Asia (Singapore and Hong Kong). They are already installed in 9 banks (e.g. Deutsche Bank, Credit Suisse, Nomura, HSBC) and have more than 30 buy-side investor firms on-board (asset managers), with a target to surpass 100 firms by mid-year. They won a tech product award for 2014 from Risk magazine.
Algomi have established a partnership with the SIX exchange in Switzerland. This is based on a licensing fee and again they are not a trading platform vendor but an information management software system that works in-house and aims to unlock liquidity, enhance trading color and relationships between sell and buy side.
They were mentioned on a Bloomberg article last week as an example of the exodus of bankers towards the Fintech startup scene.
Algomi was founded by three former UBS employees in 2012 and is backed by a venture capital firm that also invested in Spotify and Angel List. They bring to them their expertise and perspective of efficiently leveraging networks.
Algomi is far from the consumer markets that have popularized the Fintech concept. Algomi is bringing change to markets driven by professional traders at the heart of Wall Street/Canary Wharf and their clients.