Bond-Trading Bots on Verge of Becoming Masters of the Universe

(Bloomberg) -- They were the “golden crumbs,” those bits of money that fall off as bonds get traded around the world.

Those crumbs were enough to make bond traders the Masters of the Universe in Tom Wolfe’s 1987 novel “The Bonfire of the Vanities.” But those days are long gone.

AllianceBernstein Holding LP has introduced a robot to execute corporate-bond trades directly with bots at dealer counterparties. The $587 billion asset manager used the system in August to complete three trades with similar digital assistants at Citigroup Inc., Morgan Stanley and Royal Bank of Canada.

“We’ve taken a traditional human-to-human interaction and augmented it to allow a machine to meet another machine,” said Maryanne Richter, global head of credit electronic trading strategy at Morgan Stanley in New York.

While computers have already transformed equities trading, the corporate bond market has been one of the last holdouts in finance’s digital revolution. Firms are slowly stepping up their use of artificial intelligence and crunching reams of data to get ahead as electronic bond trading becomes more prevalent.

Automation is making inroads on trading desks, such as at UBS Group AG and HSBC Holdings Plc, where robots are making bond sales more efficient. More than 40% of capital market participants that took part in a Greenwich Associates survey earlier this year said that their firms are using AI for trading. Another 17% said they will introduce it within the next two years.

Still, this is the first time that bots have traded with other bots in corporate bonds, according to AllianceBernstein.

The robot is an extension of the asset manager’s virtual assistant, named Abbie, which pores through data and identifies for traders the best bonds to buy or sell. AllianceBernstein gathers about 4 million data points a day to work out the best ways to trade including bid and offer prices from dealers and electronic trading venues.

“Right now they aren’t replacing traders, they’re really just helping us trade”

Executing trades involves a number of manual steps. Currently it can take traders up to 20 minutes to negotiate the size, price and precise maturity of a trade with a counterparty on the other end of the phone or instant message. With bots that could become almost instantaneous.

“Machines are helping us to make smarter decisions and be more efficient,” said James Switzer, global head of fixed-income trading at AllianceBerstein. “I guess we could look out 5 or 10 years and start anticipating what would happen, but right now they aren’t replacing traders, they’re really just helping us trade.”

The robot is designed to save traders time and beat competitors, a meaningful edge in a secondary market starved of liquidity. It could also be developed using AI to remember the best counterparties for certain trades and target them first in future, a system known as smart order routing, according to Switzer.

In the test cases, AllianceBernstein made three separate trades in investment-grade U.S. corporate bonds with each of the three banks and the firm expects to expand that to more dealers in the coming months. The bots agreed to the transactions on the signal of a human trader.

“The master is telling the dog to fetch and bring the stick back,” said Switzer.

In the future, AllianceBernstein expects the bot to spot the best prices within parameters previously set by a trader and execute automatically. That would mean it would no longer need a human to give the execute command, although to be sure, the firm will still have human checks and balances including compliance.

Citi and Morgan Stanley both expect their trading algorithms to be able to directly handle requests to trade and execute without human command, depending on the nature of the transaction. A spokesman for RBC Capital Markets declined to comment on the trade with AllianceBernstein.

“We’re automating parts of a very manual process,” said Kevin Foley, head of markets electronification at Citi in New York. “Phase two is fully-automated straight-through processing.”

It’s surely a world Bonfire’s bond trader Sherman McCoy would have no place in as the crumbs disintegrate.

“Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that,” Wolfe wrote in his novel.

(Updates with reference to electronic trading in fifth paragraph. An earlier version of this story corrected assets under management for AllianceBernstein in third paragraph.)

To contact the author of this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, James Hertling

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