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Can Convertible Bonds Give You the Edge?
June 13, 2017
Half-bond, half-equity, convertible bonds are notoriously difficult to trade and model. And it’s not always easy to understand your risk because you’re exposed to every market variable under the sun – from dividend forecasts and equity volatility to interest rates and credit spreads.
Historically, technology has exacerbated the problem. Many firms run multiple systems for convertible bond desks: one for modeling and another for idea generation, one for booking orders from clients and another for equity order management – and yet another for allocations, compliance and risk. This, of course, doesn’t just hamper your ability to make smart decisions ahead of the competition; running and maintaining all these systems takes a huge amount of time and resources.
But many market observers think that convertible bonds will become increasingly popular over the next few years, now that interest rates are rising and, consequentially, the stability of the equity markets is becoming less certain. As finding the edge in any market becomes more important, what is your firm to do?
The sell-side market structure has fundamentally changed. Banks are more risk averse and aren’t putting up the capital; Meanwhile, trading books have vastly shrunk and firms have retreated from research. So tiers of size of sell-side institutions are shrinking. The world is getting flatter, the liquidity providers are becoming more homogeneous, the market is becoming more competitive across the old tiers and sell-side trading strategies are becoming more similar. Since the Volcker ruling, even big banks have to work hard to find liquidity in the market, and more and more firms are acting like agency brokers than the proprietary book-wielding banks of old.
To win in this new marketplace, you must not only understand who and why somebody would want to sell something, and who and why somebody would want to buy something, but you must also have a system which enables you to react to the best possible market opportunities before your competitors. And you can’t do that without extremely efficient and intelligent use of data.
That’s where a single platform can help. While it must be able to analyze data in the most sophisticated ways; complete all booking, confirms and downstream reporting; perform real-time risk and real-time P&L; and manage regulatory reporting, consolidation saves money by eliminating mass legacy systems. Even better, a consolidated system can make your firm faster and smarter, and thus able to make more money than your competitors.
And that’s what everyone on the sell side, from the CEO to the trader, wants, isn’t it?