Sellside repo e-trading landscape
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Globally, the sellside repo trading industry is long viewed as resistant to the automation and e-trading trends witnessed across other asset classes, such as fixed income, over the last decade. A lack of innovation thinking within the repo trading technology space can be attributed to the stubborn persistence of voice trading that is driven by buyside client demand to interact with Corporate Investment Banks (CIBs) on a manual basis. Another factor is the sense of convention given by repo voice trading within the inter-bank marketplace, which is driven by the often complex nature of many different types of repo instruments or products and their respective, bespoke trade lifecycles.
However, Q3 2023 GreySpark interviews with several Tier I, Tier II and Tier III CIBs revealed that while manual voice trading continues as a norm within the business process and workflows of repo sales-traders, there were several ‘leapfrog moments’ recorded since 2020 in the automated trading of repo contracts. This has led many market participants to continue to believe that a fully e-traded future for the instrument class remains a possibility. Those leapfrog moments are partly attributable to the continual trend of modularisation and componentisation within both the in-house built and vendor-provided repo e-trading systems space. These efforts are fundamentally driven by an ongoing need within CIBs to corral and monetise the vast amounts of repo market and trade data available to them that can be used to enhance request-for-quote (RFQ) pricing and improve trading strategies.
From a business perspective, Q3 2023 GreySpark interviews with repo sales-traders working within several Tier I, Tier II and Tier III CIBs found a clear distinction between those institutions that rely on manual, voice-centric business workflows versus those that have developed the capability to trade repo on a e-manual basis. In a manual set-up, significant portions of the pre-trade and at-trade business process and workflow activity depends on file sharing and human intervention, and automation is typically only found within elements of post-trade processes that are controlled by straight through processing (STP). In contrast, automation capabilities are more prevalent within e-manual business process and workflow. In this, core elements of the trade lifecycle use API-centric data feeds along with STP to feed trader activity into trade booking systems and, subsequently, into specialised post-trade processing and regulatory reporting solutions capable of ingesting and handling the outcomes of the activity with minimal intervention.
GreySpark believes that this distinction between the two different types of business process and workflow approaches to repo trading is important as it is often indicative of the need or willingness of a CIB to invest in vendor-provided solutions capable of augmenting or replacing entirely the in-house built portions of a franchise’s technology stack. For example, if an institution is seeking to transition its manual repo trading business process and workflow into a more automated, e-manual state, then it would typically do so as a means of benefitting from economies of scale created by a several factors that include:
• Reduced or eliminated manual touch on execution;
• Reduced or eliminated post-trade correction; that is, pricing, defaulting, routing;
• Reduced fails;
• Reduced margin calls;
• Optimal use of collateral;
• Reduced credit breaches;
• Increased identification of credit breaches;
• Increased transparency of funding costs;
• Visibility and allocation of balance sheet usage; and
• Improved hit ratios for client business, faster response to client inquiries.
The figure below juxtaposes the manual and e-manual repo trading business processes and workflows that are found within some CIBs, showing how sales-trader workflow beginning with ladder(s) aggregation through to RFQ management encompasses price distribution, price origination, order capture, pre-trade management, and post-trade reporting and downstream integration of other post-trade processes. These capabilities would typically be handled by a variety of in-house built and brokerage venue or technology vendor screens or solutions.
Source: GreySpark analysis.
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