You’re trying to buy a used car, and you’re having difficulty.
There are many, many more cars out there now than there were a few years ago. The old go-to used car dealers have smaller lots and less inventory, and they have been replaced by online dealerships.
But its a hassle to compare all of those at once.
That’s pretty much the position bond investors find themselves in right now.
The bond market has exploded in size, and yet market-makers — firms charged with making sure buyers and sellers can get the trades they need — are holding fewer bonds on their balance sheet, which makes life difficult for investors looking to make big trades.
A bunch of electronic platforms have popped up to make up for this, but they’re all over the map.
AllianceBernstein, the asset manager that oversees $487 billion, has a solution to all this chaos. The system is called ALFA, which stands for Automated Liquidity Filtering and Analytics, and it pulls all the various platforms together into one place — giving the firm a real-time view of the entire bond market.
According to investors and traders, this is the smartest tool out there. And AllianceBernstein is now showing off the system to other investors, and looking at commercialising it.
“The credit trading desk at AllianceBernstein is consistently on the cutting edge,” Amar Kuchinad, CEO of bond trading platform Electronifie, told Business Insider.
ALFA takes in data from the slew of trading venues that have popped up, such as TruMid, Electronifie and Liquidnet, as well as legacy players like MarketAxess. It is also plugged in to Project Neptune, and is about to connect with Tradeweb to receive data on dealer inventory.
The firm started developing ALFA last June, and rolled it out in October. It now works across investment grade, high yield, emerging market and municipal debt and structured credit.
It is also built to be flexible. Electronifie recently rolled out an auction-based trading mechanism, and the ALFA system now alerts AllianceBernstein traders whenever an auction takes place.
“It puts all that information at your fingertips, so you can make an informed decision,” Tim Morbelli, vice president of credit trading at AllianceBernstein, told Business Insider. “All these different venues are trying to solve that issue of liquidity, but liquidity doesn’t necessarily make you more efficient. Efficiency can help generate more liquidity, however.”
There is also a wider shift at player here. More sophisticated technology is allowing firms like AllianceBernstein to become a price maker, rather than just a price taker.
Investor used to have to rely on dealers to set the price of a bond. Now they can let the market know what they are willing to buy and sell at through all-to-all trading platforms that welcome all market participants as traders.
This is happening across the investment universe; according to research from Greenwich Associates, almost one third of investors either currently or plan to make prices in the next 12 months.
“There has certainly been a lot of talk about the role of buyside participants in the fixed income market, but that conversation stops and starts with their trading technology,” Chris White, the founder of consulting firm ViableMkts, told Business Insider.
“In order to be a price maker, it requires technology that many buyside firms don’t have yet. [AllianceBernstein] are taking the necessary innovative steps to follow through on that price making goal.”
That approach has had a real impact on trading costs.
Analysis has shown that all-to-all trading delivers better pricing than trades place with dealers, according to Morbelli, with AllianceBernstein saving 4.5 basis points on average on the bid-offer spread, or the spread between where buyers are willing to buy (bid) and the price at which sellers are willing to sell (ask).
It adds up.
Now AllianceBernstein is showing the ALFA system off to other investors.
“We think the next step is to get it on a web-based application,” Morbelli said. “We’re also looking at having a JV with another firm, and having them build it out and push it. This will prove it is an independent system.”
The fund manager has a “competitive advantage right now” thanks to the ALFA system, according to Morbelli, so why not keep it under lock and key?
Because AllianceBernstein, like everyone else, is tired of hearing about tough trading conditions.
“If everyone has one of these, great, then we can focus on investing,” Morbelli said.
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