Neptune Anticipates Increased Buy-Side Partners Ahead of MiFID II

Looming best execution requirements under next year's MiFID II is expected to increase buyside membership.

Neptune, the open standards network for pre-trade indications in bond markets, has said that looming best execution requirements under MiFID II will help it increase the number of buyside participants on its fixed income pricing platform in 2017, according to a Reuters report.

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Neptune has 17 dealers live on the network and expects that number to be increased to 21 by the end of the first quarter.

According to Byron Cooper-Fogarty, who heads up sales for Neptune Networks, the banks that have already committed account for around 85-90 percent of European credit volume.

Focus on Buyside Membership

As well as a drive into both the US and emerging markets, Neptune’s other main focus this year will be on increasing its buyside membership, which should be helped by the arrival of the European Union’s MiFID II regulation next year.

Neptune currently serves around 30 investment firms that receive information on over 19,000 line items daily, around 85 percent of which are axes and 15 percent inventory.

MiFID II will require them to be transparent when trading bonds for clients which will involve recording why they chose to buy from a certain dealer at a specific time.

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Fixed income trades are often influenced by non-price factors such as timing and liquidity, but being able to show the available options at the time will be valuable to firms in proving to regulators they get the best deal for their clients.

“Pre-crisis the big asset managers used around 10 dealers, but as banks reduced liquidity provision during and after the crisis, that has grown to 50-plus in some cases,” said Cooper-Fogarty.

He elaborated: “Whilst the top 10 still accounts for the bulk of trading for these asset managers, a price aggregator takes a lot of the heavy lifting off buyside traders in these more fragmented markets.”

Information Leakage

Information leakage has been one of the biggest barriers to the adoption of new technologies in secondary fixed income markets. This is because dealers and investors can be reluctant to post information to platforms that could reveal their strategies or move the prices of securities they are looking to trade.

As a platform promoting transparency, Neptune drew early scepticism from some dealers wary of its impact on their ability to make markets, though this was addressed by allowing providers to control the amount of information seen by each subscriber.

Neptune now pitches itself as a utility. According to Cooper-Fogarty, it has no ambitions to acquire “desktop real estate”, or to be a trade execution venue. 

“We are about connecting the buyside to the sellside,” he said, adding that this is still done primarily via order management systems rather than execution management systems.

“Use of an EMS will take off in fixed income eventually, but at the moment trading venues are reluctant to connect to EMS because it diminishes their role, whilst promoting the bank to investor relationship.”

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