Fixed income trading focus | Beyond MiFID II – Best Execution article

Sassan Danesh, Co-Chair, OTC Products Committee, FIX Trading Community outlines what he sees are the priorities for buyside global heads of trading in a post-MiFID II landscape.
With preparation for MiFID II now well and truly underway, this article looks at three trends that will likely pre-occupy buyside trading desks in 2018 once MiFID II implementation is out of the way:

• The continued growth in market data costs;
• Efficiencies in bilateral OTC trading;
• Electronification of the primary markets.

Addressing the market data cost challenge in fixed income

The continuing electronification of fixed income has resulted in the availability of a diverse set of market data for the buyside, which has improved price discovery and provided the basis for rudimentary forms of transaction cost analysis within fixed income. However, alongside these benefits is the ever-growing cost of connecting and consuming this data from a heterogeneous set of sources of varying quality and formats.

The anticipated explosion of additional market data, as a result of MiFID II’s pre and post-trade transparency regimes, will exacerbate this challenge, making the cost of consuming the market data a significant challenge for the buyside.

In order to assist market participants with this cost challenge, the FIX Trading Community has already published best practices for the dissemination of fixed income market data via trading venues, thereby allowing for streamlined and standardised publication and consumption of trading venue market data. Furthermore, work is now very advanced to extend the FIX Protocol for the standardised dissemination of MiFID II post-trade transparency data from Approved Publication Arrangements (APAs). This work will assist in constraining the additional growth in costs resulting from the need to consume the new APA market data.

However, one area that has not been standardised to date is the supply of market data direct from market makers to the buyside. A direct sellside to buyside standard offers a step-change reduction in the cost structure of the industry by simplifying and streamlining the market data ecosystem. To achieve such savings requires the standardisation of the diverse publication formats used by individual market makers. It also requires the vendors that are part of the market data ecosystem to adopt the standard, which in turn may require a change to their business models to focus pricing on value-added services and away from the provision of proprietary formats and connectivity. Such a change has the potential to spur additional innovation across the entire industry value-chain resulting in increased benefits to the buyside.

Efficiencies in bilateral OTC trading

The rise of electronic trading in fixed income has resulted in significant benefits to market participants, in the form of straight-through-processing (STP) and speed of execution. However, these benefits have been gained mostly in odd-lot trading on trading venues. Block trading is still predominantly occurring over the counter (OTC) via bilateral discussions with individual market-makers via voice or IM chat. This is perhaps not surprising, given the illiquid nature of many of the products, which increases the need for additional pre-trade information leading up to the execution.
This leaves a challenge for the buyside to streamline and automate bilateral OTC trading, especially given the additional burdens that non-electronic flows will face post-MiFID II with respect to stringent record keeping obligations across the entire trade lifecycle.

The FIX Trading Community is at the forefront of the electronification efforts within fixed income, having already published best practices for electronic trading via trading venues which has resulted in streamlined connectivity to trading venues. These best practices also cover the electronic trading of block-sizes on venues.

However, existing standards leave out the substantial volume of OTC trading that takes place bilaterally. There is large scope for electronification of such trading, to streamline the cases where the buyside choose to trade bilaterally rather than through an MTF or OTF. An agreed standard for OTC trading has the potential to bring all the efficiencies of STP to OTC trading across the entire lifecycle of the trade.

Fortunately, some of the pieces required to implement a standardised and streamlined electronic OTC workflow are already in place. In particular, the provision of pre-trade IOIs in a uniform manner already exists as a FIX standard. Therefore, the key remaining requirement is to establish a standardised approach for the electronic exchange of messages required for the trading phase of the OTC workflow.

By maintaining the OTC nature of existing workflows but migrating the interaction onto electronic channels, such an approach has the potential for a radical reduction of industry costs through increased operational efficiencies in OTC trading.

Electronification of primary markets

MiFID II is resulting in wholesale change in secondary market trading, but the regulation has mostly bypassed the primary markets which have not faced significant change to their existing manual processes. However, the increased size of the primary markets relative to secondary markets in recent years, together with the relatively manual processes that exist in this space today, provide opportunities for the buyside to streamline their primary workflows through increased electronification.

FIX Trading Community members have been at the forefront of establishing standards in this space, albeit with an initial focus on equities issuance. Indeed, one or two vendors have already started to work with these standards to implement electronic workflows in fixed income that allow the buyside to interact with existing systems used within the Debt Capital Markets businesses of the investment banking community. This early work is gathering momentum within the end-user community as it demonstrates the real benefit that such electronification can bring to the buyside.

With the progress towards the implementation of electronic workflows in the primary markets now well established, it only remains to be seen how quickly other vendors and end-users will participate in establishing a broader ecosystem of stakeholders to drive innovation and diversity in this space.


The three areas described in this article will likely be of interest to the community once the current focus on MiFID II concludes in early 2018. The common theme across the three areas is the role of standards to drive additional efficiencies in fixed income, once regulatory implementation for MiFID II is complete.