Equity trade execution has been electronified now for many years. The term “high touch” trading is a term often referred to by the senior or veterans in our business and is not used too often by the new generation on Wall Street. But what about the fixed income world? Are managers still picking up the phone to get quotes? The answer may shock some, but yes, they are! Many would argue that this “old school” process is cumbersome and outdated. As a veteran, I place tremendous value on the human component of all trade execution. That being said, the two most commonly asked questions we hear from both trains of thought are:
#1 The Veterans: How do I know that the person on the other end of the phone is giving me the best quote?
#2 Team Electronic: How do you know the price in your system is the best out there?
I sat down with David Lee, Director of Fixed Income, for a fireside chat to discuss how CAPIS approaches fixed income trade execution with these two primary questions in mind. Time and time again, we have found that a balance between the two approaches yields the best execution results. In our conversation, we explore how our trading desk integrates the old-school high-touch model, with the ease of modern electronic execution.
Coleen: How do most clients access our fixed income liquidity: via our electronic platform, our trading desk, or is it a combination of high and low touch?
David: It’s a combination of both. Our bank trust/wealth advisors favor the electronic platforms while our larger asset managers, insurance companies, bank portfolios, and pension funds utilize direct communications for ideas and execution.
Coleen: We know that ease and efficiency are key to our clients, and the electronic platform certainly offers ease of use, but how do clients know that they are getting the best price on the platform?
David: Many of the electronic platforms operate with little or no human intervention. Given the fixed income market primarily trades in over-the-counter fashion, the CAPIS desk oversees all the electronic orders and verifies that there is no better price available. If there is a better price, our desk will intercept the order to access superior pricing for our clients. That is the main difference between our electronic offering and that of our competitors, many of whom give their clients electronic trading capabilities but don’t interact with the platform themselves.
Coleen: I understand that small transactions may be well-suited for an electronic platform, albeit with a high touch desk to support the effort, but what do you say to a manager that uses one or two strong relationships to execute larger positions?
David: Let me answer that through the lens of a recent example. A manager came to us seeking bids on 59 corporates. CAPIS accessed 70+ regionals and primaries. No firm bid on all bonds and seven firms submitted winning bids. While you may never be selling 59 items at once, the story does not change…no single dealer will be best on all trades. You have to extend your reach if you want to find the best price and over thirty years our desk has built and continues to maintain strong relationships with our trading partners.
Coleen: As you mentioned, we have many clients who prefer to pick up the phone or send an IM, and their process is to go to the same few dealers each time for bids/offers. How is our desk structured differently in terms of accessing bids/offers?
David: Again, let me refer to a recent event. A large list came across our desk and primary dealers won less than 50% of the bonds. And while two primary dealers bid on the highest percentage of bonds, they provided the least attractive bids (-36.5 bps and -74.9bps, respectively.) Many other primaries had the opportunity to bid but only four total provided winning bids – the rest went to regionals. One regional bid on 14 items in this example and won all of them. The point here is that locating this firm, working the order, and sourcing a vast liquidity pool and network, was the key to getting the best price for the client.
CAPIS can do this because we have no competing lines of business and do not engage in proprietary trading. We are not tied to pushing our risk positions over any other issues. Our structure allows us to act as our client’s personal shopper and keeps our primary focus on trading as efficiently as possible given our client’s needs.
Coleen: Many of our clients use our platform for smaller trades and our desk directly for their bank portfolios. Do you feel like small to midsize bank portfolios get serviced differently based on their size? How can these clients feel confident that they are getting the best execution on their bank portfolio trades?
David: Portfolios tend to receive services based on their ability to generate fees in the bond market. Primary dealers will focus on those portfolios of over $5 billion and the regional dealer community will focus on those portfolios in the $500 million to $5 billion range. CAPIS services a spectrum of accounts from the smaller asset manager up to the largest, as well as insurance companies, pension funds, and banks — and all clients receive the same level of attention from the desk regardless of portfolio or trade size.
In summary, regardless of your current process for fixed income trading, there is no definitive one-size-fits-all approach when it comes to fixed income execution. From our experience, clients seem to find the most value when implementing a combination of both a high- and low-touch approach. Every trade is different, and therefore the CAPIS approach is different by design, as we consider clients’ individual needs and the best approach to each trade.
For questions or to learn more about CAPIS and fixed-income trading, please reach out to Coleen Donohue at (214) 978-4784 or [email protected] and follow us on Twitter (@capisinc) and LinkedIn for more updates and insight from our team.