FIX/API Interoperability: Bringing Automated Trading To Complex Dealer Desk Technology
Automated trading is starting to take hold in the fixed income markets. Eighteen per cent of trading for passive funds, for example, is auto-executed on a platform from a streamed price, according to a 2021 survey of 30 buy-side trading desks by The Desk.
And trading can currently be automated for up to 30 per cent of corporate bonds in the European market, says Vuk Magdelinic, CEO of Overbond. “I do believe that increased trade automation of higher-rated credit bonds will be a mainstream trend in 2021 and 2022,” he recently told Euromoney.
Beyond the development and widespread adoption of electronic trading in the bond markets, the ability to automate trading is being made possible through the confluence of three factors: the development of AI models that can price fixed income securities and score their liquidity; an increase in speed resulting from advances in cloud computing; and the development of protocols that allow for data aggregation and increased interoperability of the systems used in trading workflows.
AI is a powerful tool for traders. Overbond’s COBI-Pricing LIVE system can now generate prices and liquidity scores for more than 100,000 fixed income instruments and build curves for more than 10,000 issuers in various real-time liquidity scenarios. And it can be “trained” to customize pricing based on the desk’s trading style and client risk preferences. This includes a margin optimization algorithm that uses information from the covers on executed trades to determine the optimal hit ratio for maximizing P&L.
But to be used for trading, these calculations need to be done in real time. Overbond’s COBI-Pricing LIVE system has a refresh rate of three seconds — making it applicable for automated trading.
To achieve this speed, Overbond uses a solution built on Amazon Kinesis Data Analytics and Amazon Web Services (AWS) Lambda, which supports parallelization — the latest in serverless cloud architecture from AWS. “It was the arrival of fast serverless cloud computing that helped the algorithm mimic a human trader in real time,” Magdelinic recently told the Economist.
Of course, the precision of AI models and processing speed can only be used for automating trading workflow if the system is fully integrated with the existing technologies on the desk. This is especially true when it comes to market-making sell-side desks that traditionally have five to 10 pre-existing systems necessary to conduct trading — and why interoperability is such an important factor in bringing automated trading to the sell-side.
Achieving Interoperability
Interoperability is the ability of different systems or programs to communicate with each other, exchange information and use that information. For Overbond’s COBI-Pricing LIVE to be used to automate trading, three layers of interoperability are necessary: it needs to ingest and aggregate data from multiple sources, it needs to integrate with the systems on the desk and it needs to communicate with electronic trading venues.
To achieve interoperability across these layers, Overbond has entered into a strategic alliance with Rapid Addition, a provider of electronic trading middleware with expertise in financial information exchange (FIX) protocol used for the real-time exchange of information related to securities transactions. This alliance gives Overbond extensive interoperability, allowing for protocol- and system-agnostic integration with venues and e-trading systems used by sell-side and buy-side trading desks.
Through its latest platform, RA Platform 3.0, Rapid Addition allows fixed income trading desks to seamlessly integrate Overbond’s AI-driven bond pricing and liquidity scoring analytics into their workflow, regardless of which internal order management system, execution management system, e-trading system, direct venue connectivity, cloud or on-premise solution they currently use.
These API connections allow for internal system integration, ingestion of pre- and post-trade data from external vendors, and liquidity venue connectivity — ultimately creating a streamlined system capable of automating request for quote (RFQ) flow using Overbond’s AI engine.
Hurdles
One of the first hurdles facing fixed income pricing AI is the lack of a centralized source of trade data. Data feeds from any single electronic provider don’t provide enough information for calculating prices and liquidity scores for illiquid securities. Overbond’s AI tackles this by aggregating data from multiple sources including vendor feeds, internal historical records and settlement-layer volume information for OTC trades from Euroclear. To ingest data from these diverse sources requires interoperability between Overbond’s AI and the systems that provide the data.
With internal system connectivity facilitated through Rapid Addition’s Open API, sell-side bond trading desks can make Overbond’s AI models their own by accessing recorded transaction history to train the model according to the trading style of the desk. By maximizing the precision of these models with cross-venue coverage, desks can significantly increase P&L.
Interoperability with electronic trading venues not only allows for the ability to trade on multiple platforms, but also opens the door for smart order routing, allowing desks to optimize execution.
Using Overbond’s COBI-Pricing LIVE gives desks the ability to fully automate 30 per cent of their RFQs and execute an additional 20 per cent with trader supervision. The precision of AI, the speed of cloud computing and the interoperability with trading desk systems are making automated trading a reality.
About Overbond
Overbond specializes in custom AI analytics development for clients implementing trade automation workflows, risk management, portfolio modeling, and quantitative finance applications. Overbond supports financial institutions in the AI model development, implementation, and validation stages as well as ongoing maintenance.
Contact:
Vuk Magdelinic | CEO
+1 (416) 559-7101
Adam Anozy | Sales Associate
+1 (647) 973-4391