Algomi knows who has those bonds you want

14 December 2017 in THE BOND MARKET by Tim Binnington

Alt Credit Intelligence from HFM

Having started out as a fin tech start-up for banks only a few years ago, Algomi has grown into a household name for credit asset managers, and now it’s trying to tempt them into selling you bonds, as the firm has teamed up with bond custodians to give buyers a route to bond holders.

Algomi is at its heart a software company, launched in 2012 at around the same time as a new wave of electronic bond markets. It began life as essentially a software provider for dealers, but has become a company on a quest to improve bond market liquidity, with a philosophy that providing better data on a bond’s liquidity, will make the whole market more likely to trade it.

“We run an information product driven by algorithms,” says co-founder and CEO Stu Taylor, “but our edge is that the information is private.”

The full article is on the Alt Credit Intelligence website (pay wall) 

Algomi began life... (in 2012) with its first solution, Synchronicity. The tool allows banks to harness a large volume of bond data such as missed trades and connecting trading desks and sales teams to help dealers utlise their networks instead of balance sheets. . Deutsche Bank came on quite early as a customer.

“Most banks had excellent technology in pricing, risk management, in straight through processing, and in auto-hedging. But not in profiling their clients.” Says Taylor, “When it came to suggesting trades to clients they didn’t have any technology in their toolset.”

“Since then, there has been an growing consensus in the market thatthe solution to this liquidity problem is data,” says Taylor “and what’s really interesting is that the data that’s really useful is fundamentally private.”

This meant that synchronicity is kept firmly within the dealer, even using its own hardware if needed, essentially making a system for managing a bank’s internal private data.

Bringing in the buyside

The next step was to add a signpost to that data that enables buy-side firms to access more market colour on illiquid bonds, and this is where the firm’s next iteration, Honeycomb came in.

Without giving up the specific data a dealer was holding, it could elect to show buy side clients how many data points it had on a bond via a free application for buy side users.

“Most of the terminal and data products are basically aggregating and repackaging data, that dealers will already share, such as prices,” says Taylor arguing that dealers, for good reason, keep most of important information private. But this information is exactly what can help a trade get done “If I give you an allocation, on a new issue of $20m and I know you wanted $50m I’m not about to put that information up.”

“This private data has a different set of rules. The first rule of private data is that you don’t talk about private data. It can’t be shared. But that doesn’t mean that it’s without value.” Taylor adds. 

Next for Algomi was connecting the dealers together, they teamed up with Euronext to offer an inter-dealer solution with Algomi-built technology. The end solution, Euronext Synapse, enables dealers to access inter-bank liquidity on their clients behalf – when a bank’s own liquidity network fails to find a suitable counterparty. When launched next year, the tool will provide dealers with another means of price discovery.

At the same time though, Algomi was embarking on another addition to its repertoire, as Alliance Bernstein was putting its ALFA system up for tenders to become a commercial product.

ALFA scrapes all the electronic markets that Alliance Bernstein was plugged into, including Honeycomb, for trades or activity happening in any of the bonds on Alliance Bernstein’s blotters.

“This really solves the timing aspect of a trading decision for the buy side” says Taylor “It tells a trader when a trade is most likely to get done,” this is in turn is likely to help pricing, as any intermediary is less likely to be taking risk to execute the trade.

Alliance Bernstein had had an external evaluation on the effectiveness of the solution, and found a 1-4bps price improvement from using ALFA.

Algomi won the tender to bring the product to market, and importantly, gained Alliance Bernstein as an investor, bringing a big fixed income asset manager on board.

No matter how good the network is, and how good the information traders have is, it always takes two to tango

“The problem with current electronic platforms is that they basically assume there’s a live buyer and seller in the market today, and they’re on my platform And that’s a big big assumption.”.”

Finding a seller

While Algomi ALFA goes some way to tackling the ‘today’ part of that equation, it’s hard to find a seller of anything, particularly in these markets

“Sales people love selling bonds, but they hate trying to buy them. To part with a bond you own, is a much harder proposition for a portfolio manager.” Says Taylor.

It therefore becomes an A-symmetric data flow, as dealers have to essentially tell the whole market that they are a buyer of something, with nobody willing to say they are seller. In addition, there’s minimal gain in doing the leg work for a dealer, so bank sales people tend to be better off working on new issue or somewhere else.

Algomi therefore, set about on its next project, to help coax sellers out of the woodwork, and reduce the amount of data leakage from dealers trying to buy on behalf of their clients.

Algomi will now provide a service via Algomi ALFA, which will allow a potential buyer of a bond to contact holders of that bond where BNY Mellon or HSBC are the custodian.

“We approached the custodians and said, ‘we deal with private data, how about we try to apply our knowledge to your data?’” says Taylor, having focused on building private data networks this pitch has to be just right “The architecture of the data and technology is very important, making sure that the technology and the right information is on the right side of any Chinese wall.”

What has resulted is that BNY Mellon and HSBC will encourage clients to take out a ‘lite’ version of Algomi ALFA when using them as a custodian. This will allow dealers to send a message to holders of bonds when requested by a client. The potential buyer doesn’t get to see who the holder is, but that holder is made aware that there is an enquiry out there, and can be pointed in the right direction.

There is no obligation on the holder to respond of course, and they can filter enquiries for certain size, but the idea is coax out sellers of assets.

“The data flow has to be one way, the custody clients can never be revealed at all to the trader trying to transact in a trade, but what we can do is tell the custody clients that there is a trade happening in something they hold.”

If we can alert BNY Mellon clients of events, they can then respond to trade flow. so rather than see a bond holding printed on trace, you will be able to see that a trade is live somewhere, and you can get involved.

The setup is beneficial for the custodian too, “For BNY Mellon, this is a value add for their clients, in a business model which is increasingly facing commoditisation and margin pressure.”  Says Taylor, adding that Algomi is set to announce a third custodian with a European focus in the near future, and that the contracts which have already been signed are not exclusive, so more custodians can be added.

Bringing hedge funds into the fin tech party

Hedge funds have typically shunned all-to-all and electronic trading platforms, typically these platforms transact in small sizes, and tend to add liquidity to already liquid bonds.

But Algomi thinks its latest venture will be a useful tool for these more active managers, even if they still transact via their dealers.  

“Hedge funds typically have much more specific needs when they are looking to buy something, as it may be one leg of a multi-leg trade, or they may think that a particular part of the capital structure is mispriced” says Taylor. “Getting your dealer to work an order for these kinds of trades can kill the opportunity, as their bid-offer spread in an illiquid bond will make the trade undoable”

Taylor points out that typically, working such a trade can mean putting a team of sales people onto one purchase, which has to be priced into the bank’s bid/offer spread, when in current markets these sales people are much more effectively used selling new issue bonds.  

“If all you’re asking your dealer to put out a request to the holders of the bonds via the custodian, then the cost, and time comes down dramatically. That can have a positive impact on the price quoted by the dealer” says Taylor. 

The future of liquidity

For Algomi, what really improves liquidity is better information.

Asset managers will never become market-makers, as some electronic platforms hope, and banks will never be disintermediated out of the market.

“The traditional sell side to buyside business model had been to price taker to price maker, a client asks for a price, the bank gives a price, the client can take it or leave it,” says Taylor “That was all done over the phone, or then electronically as an RFQ, and now some other protocols.”

“I don’t know what the future of bond trading will look like, but what I do know what we have here is genuinely new data which traders haven’t had access to before and it’s all actionable. “