Deutsche Bank re­places cap­i­tal with in­for­ma­tion

The Pak Banker - - OPINION - Dan Barnes

Do­minic Hol­land, head of credit etrad­ing at Deutsche Bank, ex­plains how tech­nol­ogy is fill­ing a liq­uid­ity gap be­tween bro­ker-deal­ers and in­vest­ment man­agers. In the fixed-in­come mar­kets, banks face an ex­is­ten­tial chal­lenge. Do­minic Hol­land, the head of credit e-trad­ing at Deutsche Bank, be­lieves that the smart ap­pli­ca­tion of IT of­fers a po­ten­tial so­lu­tion to this chal­lenge.

The Basel III cap­i­tal ad­e­quacy rules make it more ex­pen­sive for banks to hold bonds, un­der­min­ing their role of mar­ket maker in the fixed-in­come busi­ness. Pre­vi­ously, they would have been able to hold bonds in their in­ven­tory over a pe­riod of time, buy­ing and selling as clients needed. The cor­po­rate bond mar­ket is nat­u­rally illiq­uid, a con­se­quence of the num­ber of in­stru­ments, of dif­fer­ent tenors, that each is­suer has on the mar­ket, and so a re­duc­tion in sell-side liq­uid­ity pro­vi­sion cre­ates a real strain on the ser­vice that deal­ers can pro­vide to their buy-side clients.

"The dis­cus­sion around liq­uid­ity in the cor­po­rate bond mar­ket tends to fo­cus around the dealer bal­ance sheet and dealer's will­ing­ness to ware­house risk given the ef­fects of pru­den­tial reg­u­la­tion," says Mr Hol­land. "But what has al­ways been key to a strong re­la­tion­ship is a mix­ture of cap­i­tal and in­for­ma­tion. Hav­ing your in­for­ma­tion well or­gan­ised at this stage of the evo­lu­tion­ary cy­cle is very im­por­tant, be­cause to some de­gree you can re­place cap­i­tal with in­for­ma­tion."

The so­lu­tion that Mr Hol­land's team de­vised was to use in­for­ma­tion to in­crease ef­fi­ciency. Where a dealer is able to in­crease its abil­ity to track where bonds are and im­prove its ca­pac­ity to trans­fer and trade those bonds, it can in­crease the turnover of its in­ven­tory, so that a small pool of in­stru­ments could be more ef­fec­tively used to sup­ply coun­ter­par­ties. That, in turn, would po­ten­tially pro­vide a real ben­e­fit to clients.

"What we are try­ing to do is or­gan­ise in­for­ma­tion," says Mr Hol­land. "Iden­ti­fy­ing where we can as­sist, and step­ping back where we don't have the right abil­ity to as­sist." The re­moval of sell-side liq­uid­ity has re­sulted in a trans­fer of ex­e­cu­tion risk in the credit mar­kets from the sell side to the buy side, ef­fec­tively in­creas­ing buy-side ex­e­cu­tion costs. In­vest­ment firms need to work out where to trade and the price to trade at, but the more they ex­change in­for­ma­tion around price and or­der size with their coun­ter­parts, the more they re­veal about their own or­der and this in­for­ma­tion leak­age al­lows other traders to squeeze them on price. What they need is to trade large size or­ders at a good price, with­out re­veal­ing their own hand to lots of mar­ket par­tic­i­pants.

Deutsche Bank's Au­to­bahn sin­gle dealer plat­form is used by clients to ac­cess liq­uid­ity across as­sets. It was de­cided to de­velop Au­to­bahn's func­tion­al­ity with the use of third­party plat­form 'Hon­ey­comb', pro­vided by tech­nol­ogy firm Al­gomi, which is de­signed to help track and au­to­mate in­for­ma­tion on in­ven­tory within deal­ers. Al­gomi tech­nol­ogy is be­ing fur­ther adopted by both buy-side and sell-side in­sti­tu­tions, with ap­prox­i­mately 70 firms sign­ing up since it launched in 2014.

"The sys­tem we de­vel­oped, Au­to­bahn PALM [plat­form for au­to­mated liq­uid­ity man­age­ment], helps our sales force to find liq­uid­ity and helps us ser­vice our clients more ef­fec­tively," says Mr Hol­land. "The team can en­ter client-spe­cific in­for­ma­tion when they re­ceive an en­quiry, or they can upload what is held in a port­fo­lio onto a cen­tralised data­base, then when the sales team is ap­proached by a client with an en­quiry or if it needs to trade, that in­for­ma­tion is en­tered and a set of pos­si­ble ac­tions are pre­sented to the sales per­son, based on the in­for­ma­tion we have glob­ally."

PALM also alerts the bank's sales team when an op­por­tu­nity for one of their clients has been iden­ti­fied, so if an as­set man­ager has ex­pressed an in­ter­est in buy­ing an illiq­uid bond with par­tic­u­lar char­ac­ter­is­tics, when another client later ap­pears as a match for the other side of the trade, even af­ter sev­eral weeks, the sales team can bridge that gap with­out the bank hav­ing to hold on to the bonds and in­cur cost. "By be­ing smart about the use of our client's trad­ing data, we are more ef­fec­tive in find­ing liq­uid­ity for our clients and, in turn, cre­at­ing more trad­ing op­por­tu­ni­ties," says Mr Hol­land. "It in­creases ef­fi­ciency, bal­ance sheet ve­loc­ity and thus liq­uid­ity."

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