Convictions outsources dealing in bond liquidity dearth
investment manager Convictions Asset Management said the challenge of locating
fixed income liquidity was behind its recent decision to outsource execution to
BNP Paribas Securities Services.
which manages €628 million in assets under management, transferred the sourcing
of liquidity and trade execution to BNP Paribas Securities Services in Q1.
“We found fixed
income to be the most difficult asset to trade in terms of finding liquidity,” Sylvain Afriat, chief operating officer at Convictions,
told theTRADEnews.com. “Using BNP Paribas Securities Services, we can reduce
the time our team spends on hunting for liquidity manually, allowing them to
focus on making investment decisions and adding alpha.”
When searching for fixed
income liquidity, buy-side firms typically phone market making brokers to
request an indicative price for the instrument they want to trade. Electronic
trading venues such as Marketaxess offer trading in some bond instruments, but
account for a limited share of overall liquidity.
Rather thanphoning each
counterpart to compare prices for bond instruments, BNP Paribas Securities
Services uses a system that polls broker quotes automatically, which Afriat
said would help Convictions better meet its best execution obligations. The 40 brokers BNP Paribas uses on behalf of Convictions are pre-validated by
the asset manager.
Fund managers at Convictions
can send specific execution instructions to BNP Paribas if, for instance, they
want to limit the number of counterparties the request quotes from in order to
manage market impact for a sensitive trade.
According to Philippe Boulenguiez, head of dealing services at BNP
Paribas Securities Services, close cooperation between portfolio managers and
the execution desk is crucial to the firms’ partnership.
“Our 40 dealers
are professionally qualified with a broad and deep knowledge of markets.
They are organised by instrument within the asset class they trade, e.g. credit
or emerging market,” he said. “Using their specialist knowledge, we can work
with Convictions’ managers to review and understand their flows.
This means we can devise and offer a specific trading strategy to
ensure the best outcome for them.”
BNP Paribas Securities
Services also provides outsourced dealing services to its parent company’s
wealth management, asset management and Cadiz subsidiaries, using a total of over
180 brokers. The extensive number of brokers on BNP Paribas’ roster allows it
to provide feedback to Convictions on its broker list.
From a post-trade perspective,
Boulenguiez said his firm offered Convictions an audit trail of each entire
order – including the time an order reached BNP Paribas and time of actual
execution – a snapshot of the prices offered by other brokers in the same
instrument at the same time, and a periodic analysis of broker performance. The money manager has outsourced its back-
and middle-office functions to BNP Paribas for the last five years.
Sourcing liquidity in the bond
market is poised to become even tougher following the introduction of new
legislation limiting a broker’s ability to offer liquidity as they have done
traditionally. Basel III – the latest set of guidelines for ensuring banks are
adequately capitalised – will require fixed income dealers to collateralise the
assets they hold on their balance sheet on a risk-weighted basis, while MiFID
II will inject pre-trade transparency requirements for bonds upon its
introduction in 2014-15.
“Given the size and the
importance of all our clients, we have the opportunity to access
liquidity that other firms often cannot,” added Boulenguiez. “Evidence suggests
that the increasing revenue pressure mounting on the sell-side means they
are continuing to prioritise their most important clients. This is
generally measured by commission and/or turnover and means that small- and
mid-tier buy-side firms can struggle to source specific liquidity,
and therefore not get the best outcome for their clients.”