Article: October 21, 2020
Technology Improves ROI of BWICs
The dealer community is always trying to do more with less. Their primary goal is to manage assets and service their buyside clients with products and liquidity that match their customer’s needs. As part of this service they are expected to provide a market to clients looking to offload bonds. This is very often done through a BWIC (Bid Wanted In Comp) process where dealers provide bids to bonds being auctioned by their clients. Volume of BWICs varies per desk, but the Mortgage desk, for example, can see over 100 BWICs on Specified Mortgage pools alone on a typical trading day, comprised of over 1,000 line-items and representing $10 Billion in total volume. It is a fast-paced, high-volume environment where instantaneous access to information and analytics is a necessity. Automation is a key driver to success and survival.
Quick Walkthrough of BWIC Workflow
Customers, be they mortgage originators or buyside clients, typically shoot an email to salespeople at multiple financial institutions with the BWIC details, including a list of bonds they are offering and a deadline by which bids have to be submitted. Salespeople immediately forward these BWICS to the appropriate trading desk for analysis and pricing. Often the dealers republish these BWICs to other buyside clients and solicits their bids. Once all these bids are received and aggregated, the trader determines the final bid for the firm and the information is relayed back to the BWIC originator via the salesperson. The salesperson keeps track of the bids, gets color on each bid and helps confirm the trade if the bid wins.
Typically, sellers only give dealers an hour or two to present their bids because completing the whole process involves aggregation of the bids, notifying the winners and booking the trades. Often, 70 percent of the BWICs come before lunch. During these busy morning hours, dealers only get a few minutes to process each BWIC, which translates to less than a minute for each bond. The communication traffic between the sellers, the sales team and the trading desk is so chaotic that sometimes bid deadlines are missed, critical color falls through the cracks and buying opportunities are lost – a loss for all parties involved.
The Old Way: Print & Share
For the longest time, the “print and share” model was the most common process for dealers fielding bid inquiry. The salesperson receiving the BWIC would print the BWIC list and walk the printed copy over to the trading desk. The desk would communicate their bids to the salesperson in writing. The sales desk would then communicate the bid to the seller. By the end
of the day, one could see a stack of printed BWICs sitting on the desk.
Surprisingly, about 50% of dealers still depend on this archaic method for processing their BWICs. In recent months, when the teams have had to work remotely, this method has been challenged and opportunities have been lost.
The Status Quo: An Excel System
Many dealers have created an Excel based system to capture incoming BWICs, track their client bids, the desk’s final bid, and most importantly, the cover they receive from the sellers. The Excel spreadsheets often use Bloomberg add-in functions to automatically fetch bond indicatives. Often, spreadsheets integrate analytics that can help them price these bonds and more sophisticated dealers have integrated TRACE data into their spreadsheets and have the ability to quickly retrieve pricing history.
The main advantage of the Excel approach is easy access to bidding and cover history. But this approach is not without its disadvantages. Firstly, this method is dependent on data being added manually to the spreadsheet. Since each seller publishes BWIC data in their own proprietary format, the task of merging the incoming information into a standard format becomes a bottleneck, especially during the busy parts of the day. Secondly, Excel files cannot be easily shared. There can be multiple read-only versions, but only one person with edit capabilities. This makes the system less flexible and the system becomes fairly unusable very soon. With thousands of lines in the spreadsheet, the historic information, although available, is not easily accessible.
The Future: Automated Systems
Financial institutions have always depended on technological innovations to streamline their workflow, reduce costs and improve profitability. The first version of the BWIC management systems was used to replace Excel files. These systems allowed traders and salespeople to use a single system where they could co-manage the BWIC process. The sales desk would create the BWICs and the traders would provide the bids. As these systems evolved, they integrated Bloomberg indicative lookups, integration of TRACE and internal analytics. In recent months, when traders and salespeople have had to work remotely, the investments in these systems have paid handsome dividends.
The next generation of systems is adding automation to the workflow. BWIC emails received from sellers are scraped and the BWICs automatically added to the system – with minimal manual intervention required. Furthermore, using integrated analytic and historical pricing, these systems accurately bid the BWICs and communicate the results back to the seller. All information is captured, integrated and communicated in a streamlined and efficient manner. As the confidence in these auto-bidders increases, more BWIC items will receive an automated bid. Traders will be allowed to focus on pricing more esoteric bonds while the salespeople will be allowed to focus on the relationships.