The Possibilities – and Perils – of Bond Issuance Modernization

By Constantinos Antoniades, Head of Fixed Income, Liquidnet

The year ahead will be a critical period for the long-needed modernization of the bond issuance process.

Primary bond market technology has been undergoing significant changes behind the scenes, with a small number of platforms and service providers making their initial launches. The bulk of these initiatives have sought to solve problems with existing primary market workflows – processes which have remained largely unchanged for decades, but have been rife with operational inefficiencies and unnecessary burdens for both the buy-side and the syndicate banks. Information and communication exchanges remain largely manual, creating redundant and low-gain tasks for all participants.

These recent developments will undoubtedly bring much-desired efficiencies, cost savings and reductions in operational risk, as well as value for investors. Yet, as with any significant change to a deeply entrenched process, widespread adoption will likely take a while to be established, especially as these various projects all compete for a place in the market. 

As an an industry, we must push for progress, while not losing sight of the bigger goal. The opportunity is there to collaborate, develop and promote utility-like solutions in a framework which ensures efficiencies and avoids fragmentation, while also fostering innovation and competition.

The primary workflow in the spotlight

In the secondary markets, electronic trading workflows had a breakout moment in 2020, as liquidity and efficiency became especially critical in the midst of the pandemic. When it comes to the primary markets, there are three underlying factors that highlight the unstoppable momentum towards  automation:

  1. The ubiquity of electronic connectivity

The shift towards electronic trading in the secondary markets has led to the universal availability of electronic connectivity. Electronic networks between buy side and sell side, trading platforms and OMS/EMS systems, facilitate the direct connections that enable automated workflows. Integration and a lack of interoperability are no longer the barriers they once were. This existing connectivity infrastructure and OMS/EMS integrations can be put to work to turbocharge electronic workflows for the primary market here and now.

  • A new voracity in the timeless search to “do more with less”

52% of asset managers in a recent Brown Brothers Harriman survey said that they would reduce fees in 2021. At the same time, many of these managers highlighted a need to modernize their trading operations. In a balancing act of sorts, technology will enable managers to reduce the amount of time that traders and portfolio managers spend on what we call ‘low-gain’ processing activities. The buy side is truly embracing the idea of having portfolio managers, traders and analysts spend more time on activities that help generate revenue and deliver value to investors. The existing manual new issue workflows are unaligned with this search for value and efficiencies.

  • Market growth calls for efficiency

The primary market is growing larger, which can make things operationally unwieldy for the buy-side if nothing changes. 2020 brought record issuance in both the US and European corporate bond markets, and the 2021 pipeline should be robust. This will increase the need for technological efficiencies in order to ensure a more systematic, compliant, and operationally suitable management of new issues1.

The appetite for automated primary market workflows is evident in the variety of projects that have been unfolding over the last two years, encompassing every corner of the market – from asset managers to trading networks and technology vendors. As exciting as this accelerated pace of innovation is, the benefits may not come if each project continues to work in fragmented and closed ecosystems with a limited view towards interoperability.

Avoiding a ‘two steps forward, one step back’ scenario

Technological fragmentation may pose a significant risk to this developing ecosystem. The benefits from electronic workflows for issuance will be diminished if asset managers and syndicate banks have to use a plethora of stand-alone systems and front-end interfaces for different market segments or regions.  

Of course, having just one provider to serve the entire primary market wouldn’t be ideal either, as this would ultimately stifle innovation and increase costs.

The solution is in interconnectivity and interoperability between different providers to ensure the efficient two-way exchange of information between syndicate banks and asset managers.  A market-driven framework will enable different technology providers to compete for the best service and price point and address different needs for different asset managers and banks.  

This technological flexibility is critical for adoption. Changing user behavior, onboarding, and OMS connectivity can be major obstacles to the adoption of any new workflows and technologies. Asset managers will have their own preferred data providers, portfolio systems, etc. – and the more any entrant has to require a stakeholder to change the way they run their entire investment analysis process, the less likely that the user will be to take it on board, no matter the benefits.  Collaboration among key participants of the primary market ecosystem – asset managers, syndicate banks, OMS/EMS platform providers, and competitors – will be essential to achieving the efficiencies that every stakeholder wants.

It will be unfortunate and against the goal of a healthy functioning marketplace, if innovation and technological efficiencies in the primary market are held back by monopolistic aspirations, duplicative costs, or lack of ambition by the industry.

A roadmap for success

With both the possibilities and potential perils in mind, the buy side and syndicate banks have set out a blueprint for what an ideal workflow could look like. It involves a network of open, interconnected, and interoperable solutions, connecting banks, investors, and OMS/EMS providers into a new issue information superhighway. Many participants recognize that no single firm has the depth of network, connectivity, technology, and other resources, to efficiently deliver such a superhighway, however different firms collaborating can collectivity achieve that outcome.

The first half of 2021 will likely unveil some new, even more meaningful strides in the development of primary market technology, as different contributors seize the opportunity to work together and bring to the table their competitive advantages and strengths, for the greater good of the industry. At Liquidnet, we firmly believe that only an open utility approach can deliver maximum efficiencies to the industry.  Partnerships, open architecture, interoperability, and healthy market competition must become the key building blocks for this new developing ecosystem.