Startup Brings Pandora-Like Data Intelligence to Bond Voice Trading
Dozens of electronic bond trading platforms are seeking to computerize the corporate bond market. But not everyone is looking for the market structure to change.
Algomi, a two-year-old startup, is focusing on the voice market for trading less liquid corporates, high-grade, high-yield, and emerging market bonds. "We're an information tool for sales and trading," Stephen Gallagher, head of US operations in New York, told us. Algomi is not an alternative trading system, "nor do we want to be."
Electronic trading has been most successful in the liquid instruments, such as US Treasuries, agencies, and mortgages, he said. For less liquid sectors, corporate bonds, and emerging markets, the buy side and the sell side are unlikely to be matched together at the same time and at the same price. "We feel today the market structure is not broken. It just doesn't work very well."
Algomi hired Gallagher, a former bond trader with 30 years of credit market experience, in the fall of 2013 to help transform buy-side and sell-side firms' fixed income businesses as they come to terms with the new market structure. From 2006 to 2011, he was head of MarketAxess Europe & Asia, where he worked with institutions and dealers in established and emerging markets. In 2004, he was head of high-grade trading at Wachovia Securities (now part of Wells Fargo). From 1987 to 2003, he led trading teams at Wachovia Securities, Bank of America Securities, Bear Stearns, and Merrill Lynch.
Algomi's co-founders -- chief executive officer Stu Taylor and chairman Michael Schmidt -- were both pioneers in electronic trading. Taylor launched UBS PIN-FI, the first internalizer model for an investment bank. Schmidt was involved with a number of trading platforms, including Deutsche Bank's Autobahn. They hired Gallagher to open the New York office and introduce their product to the US market.
"PIN was a platform to see if you could get the sell side and buy sisde together and disintermediate the sell side," Gallagher said. "They quickly reliazed that wasn't going to work, and that the opposite was to help the market structure of voice trading."
Algomi has pitched its Synchrnocity product as an information matching system that helps the voice trading market structure become more efficient. So far, the firm has nine customers -- all global banks with users in Europe, the US, and Asia.
Pandora for the trading desk
The financial technology startup sees an opportunity to create a collaborative community across sell-side trading desks within an organization. It describes itself as a "provider of information-matching solutions to optimize fixed income liquidity." Its product helps sales traders assemble, organize, and prioritize massive amounts of data on a client's holdings, transactions, and new issues.
Using algorithms and technology similar to Pandora and Amazon, Synchronicity helps the sales trader remember recent deals transacted by specific clients. "What we do is go into the bank and aggregate all of their data," Gallagher said. "With that history, we build a sales and trading tool to enable sales traders to work on the most applicable trading for them."
For example, each sales person has a unique set of data about clients and accounts. Synchronicity builds profiles around the sales person and his or her client base and overlays intelligence. If Pandora knows someone listens to the Beatles, it will suggest other songs by the Beatles or similar groups. Amazon will suggest books based on the reader's past history. Similarly, when Algomi knows a sales trader needs a particular bond for an order, it will look at what other sales traders have executed in the past. It can also bring in sales traders' emails, telephone conversations, and chat messages.
In a Synchronicity demo, Gallagher explained how the product works. At a bank, say that sales trader James handles all the auto bonds -- Mercedes, BMW, Ford, GM -- and has a buyer for a particular BMW bond, 19s, for his client. Synchronicity finds out that another sales trader, John, who covers Pimco, sold BMW 19s to the fund manager three months ago. Algomi will "drag" the trader into the collaboration group. The system finds out that John was active in BMW 19s earlier in the morning. In the past, John would not have remembered that his client bought those bonds three months ago, or the information would have been buried in a notebook or a lookup system.
Another reason to involve John is that he had a conversation with a client in Spain that morning that was offering BMW 22s. This is called "fuzzy match," since the 22s are similar to the 19s and not much longer in duration. "You can see how this helps them to start to make appropriate calls in a timely manner." Then another sales trader, Suzy in Chicago, is brought into the collaboration group. These are all sales people in the same bank who have a history around BMW.
In real-time, four people can now help James locate these bonds. It takes 30 seconds to get the relevant information and collaboration group together.
The system can also bring in live data from exchanges or FINRA's TRACE bond ticker, along with any streaming price data from the fixed income sector. If a bank has published a research report on a particular sector, it can push that to the client in real-time.
Though it has focused on the sell side initially, Algomi is also working on a buy-side product to address the challenges of dealing with thousands of messages from Bloomberg chat systems. "We're viewing the world as an information network," Gallagher said, "so once we get the buy side and the sell side, we create a huge network digitally."
Algomi received funding from Lakestar, an early investor in Facebook, Airbnb, and Spotify. "That is what our investors see -- their play in financial digital networks."
Digitizing information residing in their back offices will help the banks at a time when their balance sheets are constrained by capital requirements. With regulations such as the Basel III raising capital requirements and causing balance sheet constraints on holding bonds in inventory, "traders can't take the trade inside," Gallagher said. "Now the sales trader has to be good at finding the other side."Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio