A Different Type of KYC: Know Your Counterparty

In the second of a blog series looking at Intelligence Hub use cases, we explore how Corvil can help level the playing field for smaller fixed income players.

In an era of any-to-any fixed income trading and where there are many more liquidity pools, the ability to measure and analyze the performance of partners becomes paramount.

In “Making the Connection: The Electronic Shift in Legacy Bond Market Workflow,” Tabb Analyst Colby Jenkins notes:

The reality is that two hypothetical institutions that are similar in strategies and PM/trading desk sophistication can achieve very different outcomes depending on their use of electronic liquidity, aggregated data solutions, and execution tools and protocols.

The application of analytics to public and internal data streams is one of the things that makes the difference. An often overlooked internal data stream is the electronic trading order lifecycle itself. By analyzing the fixed income order lifecycles of each institution, firms can create performance profiles, with data on notional volumes, hung orders, client hit rates, and infrastructure performance metrics by platform, counterparty, security, etc.... This intelligence becomes the basis of data-driven decisions on pricing and with which counterparties to engage.

The better you understand those with whom you are trading, the more effective you can be in adjusting your strategies and pricing. Fundamentally, it comes down to where you send your business flows and identifying anomalous performance of one or more of the counterparties. If spillover is having a much greater impact on one institution over another, for example, you can switch and reduce your risk exposure.

With the advantage shifting to those who systematically make decisions based on data, it’s creating a climate where the big financial institutions are winning and smaller players struggling because obtaining that level of intelligence directly from trading messages required a triumvirate of skills and a lot of big data grief – until now.

Corvil’s newly launched Intelligence Hub is a way to level the playing field by empowering execution strategies with counterparty intelligence that could be business transformational. For example, business analysts could identify how optimum connectivity to a given liquidity pool may attract more business from a certain type of customer for a certain security. They can apply anomaly detection to data points that are of greatest interest and use those alerts to adjust counterparty pricing or order routing decisions.

In short, there is a simpler path for firms to take to optimizing execution for the best outcome. Understanding the behaviors and outcomes by counterparty as well as changes to those norms provides valuable intelligence to enable strategy and pricing changes to maximize spreads and trading performance.