Fixed income has always faced the problem of having too many manual processes. Additionally, compared to the stock market, it generally lacks transparency, with respect to asset pricing and inventory. Now, thanks to partnerships in the financial sector and innovative software solutions, information gaps are being addressed.
Improving inventory sourcing and communication in fixed income
BankingTech reported that Project Neptune is a collaboration of 30 large banks and asset managers that hopes to improve the fixed income market by addressing inventory sourcing and dissemination of reliable information. The project started in October with the intention of creating a standardized language and messaging system for fixed income trading. Notable participants include JP Morgan, HSBC, Barclays, Credit Suisse and Goldman Sachs.
Due to increasing regulatory pressure over the last few years, identifying inventory in fixed income has been troublesome. Credit markets tend to be illiquid already, and with the new regulations and forced balance sheet reductions, credit bonds in particular have been affected. Sassan Danesh, chief executive at Etrading Software, a consultancy that helps manage Project Neptune, explained promoting increased turnover in fixed income markets is now needed more than ever. If market makers are able to turn over inventory more frequently, deal activity will help mitigate any stifling of the capital market.
“We want to standardize the dissemination of inventory information, so that at a pre-trade level it becomes much easier to work out who has the inventory needed to trade,” said Danesh, according to the news source. “One of the key elements of Project Neptune is that it aims to directly connect the buy-side to the market makers that have the inventory.”
BankingTech pointed out that communication in fixed income markets has traditionally been through phone calls, emails and Bloomberg’s messaging system. Those channels are, however, very manual and unstructured. By having a better and standardized method for communication, buyers and sellers will be able to respond more quickly and efficiently. Danesh noted that Project Neptune facilitates communication, but also keeps privacy protected. Ultimately, the goal is modernize the market.”The whole fixed income markets are much less automated and much less electronic than other asset classes such as equities and there’s a reason for that,” added Danesh. “It’s because the products are much less standardized, the size of each trade is higher, ticket sizes are higher and there are fewer tickets.”
“Stone Point Capital invested in Black Mountain Systems because of the value-added services it provides.”
Technology is modernizing the fixed income market
The ability of technology solutions to improve financial markets has received much attention in recent months. The last few years have been dubbed the era of financial technology because of the strides made in the financial sector thanks to the work of startups and entrepreneurs. Recently, Black Mountain Systems, a software company that develops innovative solutions for data management and trade processing for asset managers and financial institutions, was acquired by Stone Point Capital. The leading private equity firm, which focuses on the global financial services industry, invested in Black Mountain Systems because of the value-added services it provides. The transaction not only allows the company to continue its quick growth, but it is testament that the financial services industry recognizes the need to update and modernize its technology infrastructure. Charles A. Davis, CEO of Stone Point explained why the company’s product, Everest, is attractive.
“We see tremendous strategic value in Everest’s highly configurable design, broad functionality and capacity to empower decision makers with complete and accurate information,” said Davis. “We also recognize the technical and client-based expertise that the Black Mountain team brings to its clients, and we look forward to working with the management team to help Black Mountain reach its full potential.”
The Wall Street Journal noted comments by Black Mountain co-chief executive Andy Horwtiz, in which alluded to the company’s mission.
“We joked that our biggest competitor is Microsoft,” said Horwitz, according to the news source. “People who use Microsoft Office software—Excel, Word, etc.—that’s what we are replacing. Managing hundreds of millions or billions of dollars on spreadsheets is a thing of the past.”
Started in 2007 by loan market professionals, Black Mountain Systems allows asset managers to perform data aggregation and order tracking in one comprehensive state-of-the-art system. Over the past few years, research, compliance, fund valuation, performance benchmarking have been added to the capabilities of the software. A recent example of the impact that Black Mountain Systems and its Everest platform has had on its fixed income clients is the case of Wasmer, Schroeder & Company.
As an SMA manager managing over 2000 individual accounts, Wasmer, Schroeder & Company was seeking technology that would enable their business to scale quickly while enhancing processes between their front and middle office teams and decreasing administrative overhead. Specifically, they were looking to build a more robust portfolio compliance capability, a streamlined trade order management process that required less input from their staff, and a trade allocation process that efficiently integrated their portfolio management program. The partnership was a resounding success, resulting in 20% time savings for the company’s administrative team and 10-20% time savings for its portfolio management and trading teams.
Ultimately, it is evident that the time to modernize capital markets is now. Investment in FinTech companies like Black Mountain Systems, and improved transparency and communication for investors, provided by Project Neptune, are both signs that the coming of a new age in fixed income is at hand.