Eighth interview with interesting people within Fintech, this time Spence Maclean of BondAuction.
Spencer Maclean is a Founder of BondAuction Ltd. The company was formed in 2021 after he left his role as the Global Head of Bond Syndicate for Standard Chartered Bank where he spent 11 years in both a syndicate role as well as running the DCM team for Europe and Americas. Spencer started his career at Credit Suisse in the late 1990s before moving to Deutsche Bank and lastly SCB. He executed transactions for clients from the Corporate, Financial, Sovereigns and Supranational sectors.
Who are you?
I started my Debt Capital Markets journey when I was at Credit Suisse. Back at the time when retention bonds where the only game in town really. So I was the new issues trader responsible for the positions in credits all the way down from triple A all the way down to single B.
Started to cut my teeth as a Syndicate manager on some of the triple A supranational names but quickly found my home in the Emerging Markets space.
Moved onto Deutsche Bank until the crash came and then moved briefly across to Credit Agricole. From there I ended up at my last shop, Standard Chartered. Very much a focus on Emerging Markets when I joined but within a couple of years my focus broadened and I ended up running the Debt Capital Markets team in Europe and the Americas. I left the syndicate desk behind for five years. Then I returned to the Syndicate Desk as the Global Head of Bond Syndicate. It was great to gain broad experience of different markets, different groups of issuers and dealing with clients both from the DCM relationship banking side of things and the cut and thrust of a Bond Syndicate desk.
I left Standard Chartered pretty much twelve months ago. I got together with some old colleagues and we formed Bond Auction. The experience that we had in those twenty plus years in DCM made us realise that very little had changed over that time. So when I started out as a bond trader bonds were held on retention. Three or four of you would take a proportionate share of a transaction and you had time to give bonds away prior to pricing and then you were left holding any residual positions.
Twenty years ago, It was the World Bank that came to us and said
“We would like to have a new form of transaction, does anybody have an e-book builder?”
Of course, all the banks put their hands up and said yes. The reality was that it was me frantically typing in orders from our sales force and other banks sales force into a spreadsheet and publishing it to a page. There was absolutely zero technology there at the time, although that transaction did fundamentally change the markets at that time: all orders were put into what they called a pot, we were all able to see them for the first time ever instead of just dealing with our individual sales forces. And the issuer decided they were going to choose where their bonds were going to, which investors were actually going to end up holding their paper.
That was quite an experience to be working on that very first trade. Of course, technology then came to address problems with solutions. We were going through reconciling simply using spreadsheets and getting on long reconciliation conference calls that would take a while to go through.
And then came the team from Ipreo with their book builder system and a reconciliation engine. Of course this eventually gathered a head of steam and sufficient momentum in Europe first, then across Asia and finally in the US. That lead to the markets becoming much faster and able to handle a greater number of transactions and a greater deal size. You only have to look at the last ten years where the average size has gone up from around $£4-5trn to around $10trn two years ago
The Electronification enabled larger appetite, larger number of players into the market. But it has really stopped there. We have seen some efforts in the last few years to allow investors to directly input orders into the books, that was met initially with some reluctance but is slowly starting to come together now.
You have journey from being the poor soul sat in front of a spreadsheet to where you are now, you have seen the market changes first hand. What does the onwards trajectory look like?
I think as the markets continue to grow and the number of participants coming into the market grows it is important that we treat everyone in as fair a manner as possible. The MiFID allocation justification process goes some way to address that but it’s really far from a transparent process. The process is currently far too iterative, in the book-building process the complaints we hear from investors are:
“If fair value is at X why on earth do you start marketing a transaction 30 or forty basis points wide?”.
We all know it’s not going to price at that level, issuers like to see a certain amount of oversubscription in the book, momentum is the way they achieve that. If you try and explain how the market handles and prices $10trn in debt to somebody that is not within the market and say “we change the price and we change the price and we keep going until eventually the momentum slows down and one or two people fall out”. Someone described it to me as “you read the tea leaves rather than do anything scientific” and the old adage in the market was “this is an art not a science”. That’s what I learnt on day one and it still holds true to this day.
I would think those words ought to ring alarm bells across the market, from the regulators point of view, from the buy-side where they are never able to reflect what they really want, where there is a book that is multiple times oversubscribed and in order to receive an allocation they want to receive they would be foolish if they reflected real appetite. It’s a very opaque process and it has been built upon wobbly foundations, more and more has been piled on top. It’s time to get together and draw a new process from a blank sheet of paper.
Sir Alec Issigonis said “A camel is a horse designed by a committee” and that’s exactly the situation we are in at the moment. So there are one or two dominant players in the market that have some products that were addressing issues at the time. There had been a reluctance to actually integrate these. At the moment we are going through something of a boom where there are lots of platforms offering solutions to different questions. The attitude that prevails among them all is that they are very open, they want to collaborate, they don’t want to disintermediate, they are offering a piece of the puzzle, not all of the pieces of the puzzle. They want to come together with others and offer a broad solution across the market. And that is also very much the approach we take.
Can you summarise what Bond Auction does?
Bond Auction is a platform that allows an investor to directly input a bid (as opposed to an order), and they will receive an allotment (as opposed to an allocation). That allotment, for the first time, because it’s based upon the competitiveness of their bid, could receive a full allotment, a partial allotment or zero. So no complaints about an allocation, since it’s down to an investor to bid sharp enough. An issuer receives greater transparency on the appetite and demand that exists for their name on that particular trade. The syndicate desks for once can answer the question “what if”. The issuers always ask “what if I go a basis point tighter?”, at the moment the syndicate guys simply don’t know as there is imperfect information given in an order book. Now there is perfect information, because each bid carries a size and a price. Therefore, as an issuer and an underwriting bank you know who is going to receive an allotment if you have pricing parameters of X. And if you change to pricing parameters of Y you can see immediately the various outcomes that are open to you as an issuer.
Is this interaction iterated or is it a one-time process?
It’s a one-time process. Investors are frustrated with the iterations of the old model, where typically you would see four or more underwriters on a transaction. You would speak to your sales desk when a trade is announced, again when the IPTs go out, again when the price guidance goes out, when the revised price guidance goes out, when you are asked to confirm your orders, when you are asked to confirm your hedges, when you receive your allocation. Repeat those conversations with the other three underwriting sales desks and it’s a wonder that any investor gets anything done because they are constantly being bombarded with messages from all of the underwriting desks.
We have a process and a platform where the trades are announced, the syndicate and DCM teams are still involved in guiding the issuer to the best time and pricing parameters to attract bids in. The sales force will be involved initially to say “here is the trade, here are the parameters”. The investor can receive information from the banks and can still speak to their salespeople about what is going on in the secondary market, all of those conversations remain open. Then they can place a bid, they can amend it and change it up until the time the books close.
Upfront there is an announcement of when the book will close, there is a defined timeline for the operation of the book that is set by the issuer with advice from the underwriters. Now we know that very shortly after the book is closed the issuer is going to reach a decision on what terms they should be setting because they have this perfect information. They can move very quickly from closing the book to setting the terms to pricing a transaction. And as an investor I know that from a book closing at 11:30 I can expect pricing potentially before noon. There is no reason for it not to be that fast. Whereas at the moment, as an investor, having spoken to my sales person five, six or seven times during the course of the process I then start ringing them up asking “When are the allocations coming?”. The sales people speak to the syndicate desk and they are busy reconciling three hundred orders. Then we have to define the terms and execute all the hedges. It’s an archaic process that needs addressing and we have a platform that addresses concerns of all three of those market user groups and delivers benefits to all three of those market user groups.
Why do you think nobody has done this before?
The current process works. The banks make a good amount of money from this and they do not want to be disintermediated. We are not disintermediating the banks, instead we are bringing an efficiency tool for all of the participants. It’s difficult for any one of them to change a process that is, as far as they can see, working. The fact of the matter is that it may be working, but it is not transparent nor is it efficient. There are a lot of grumbles and a lot of complaints about this process from market participants. We have seen about five years ago with some efforts to allow investors to directly input their orders there has also been a change on the buy-side. They are now open to the fact they need to change, they now want seamless integration. So we are working on having integration with the buy-side OMS so that orders can flow straight from OMS. There are interoperability companies that will allow those workflows. All market users now want a seamless process, before they didn’t but now there is a change coming.
The legacy players existed, had a product that offered a solution and there were barriers built around these platforms, they did not want anyone coming in. The new entrants to the market are very happy to work with each other and the banks are slowly building their pieces of the jigsaw using these external companies. There’s an attitude change that has taken place.
We are seeing people are open to change. It’s a cruel irony, you probably know this better than I do, that in order to bring around change and speed things up you have to go through a tedious and incredibly slow on-boarding process.
You have been a very successful Investment Banker at Credit Suisse, Deutsche Bank and Standard Chartered. What made you want to flip out and go into the riskier world of fintech and start-ups?
Very candidly my role at Standard Chartered was restructured and so I found myself looking for what I was going to do for the next stage of my career. I had a decision to make: did I want to go back into the same world for which there were options out there for me. I guess there is safety for working for a company in terms of a salary, healthcare and all those wonderful things. There’s also the camaraderie of being in a team within an organisation and the fun of addressing challenges that exist in companies and of building better, stronger teams. Or you take the more adventurous path of a start-up? I thought about it and decided it was a great opportunity for me to look at a truly alternative career path. Having spent all of that time on Syndicate desks and DCM desks I had seen the frustration caused by this process, I had spoken to the investors, I had spoken to the issuers, I had experienced it myself. I thought, if I don’t do it now when am I ever going to do it? We set up the company last year, a few months after leaving Standard Chartered. We built our wireframes, we made the announcement in the Autumn of 2021 and set about calling old contacts and taking the temperature of the reception for this in the market. I am glad to say we had a strong positive reception across all three of the user groups. I cannot stress enough that we have three user groups of this platform and we want to deliver benefits for all three. We got that positive response from all three and so we continued. We are currently in the construction phase. We will be feature complete by the end of H1 2022. We have an early adopters group that are providing us with feedback as we roll-out different elements of the system to them. We are looking to be live with this before the end of 2022.
Pretty punchy timeline?!
Yes! That was the feedback we got when we first announced, when we set out a timeline leading us into Q1 2022 people said “good luck, we don’t see anyone hitting those timelines”. In the New Year we pointed out we were running exactly to time and we laid out the timeline for the rest of this year. And I am glad to say we are still hitting our targets on time.
Moving into the adventurous world of fintech does mean you can move at a pace that would sometimes be frustrated in larger organisations. It is wonderfully uplifting when you can get things done! We are working with other partners, we have a development partner, we have had a user experience partner and everyone just works at a very different pace [to investment banking] and it’s really refreshing.
There’s an Elvis song “A little less conversation (A little more action)”
(Laughs) Yes!
What would you say to people within a traditional banking world if they are looking at the new world of fintech?
What I would say to them (and this is probably the advice I needed to give myself at the time) is stop, pause and really think about what is going on. Understand that there is more than one solution to a problem. Keep going, don’t let the frustrations of those inefficiencies of committee decision making hold you back in your desire to keep pushing things through because change is coming. A lot of people in traditional banking are very good, so it’s not so much advice as a boost and reassurance that they will get these things done. Keep heart, keep strong and you will get there in the end!
Within the world of Fixed Income, what changes would you like to see in market structure?
I think of a couple of things:
Having the open APIs to empower vendors to work with other solution providers. We are not fully there with everyone, so that needs to happen.
We need to see standardisation. That can come in in different places:
- standardisation around SLB or Green Bonds
- standardisation around ESG ratings
- standardisation around the structured data of bond transactions so they can be easily input and dealt with by the OMS.
That will lead to huge change. But again it’s a decision by a committee where people have such opposing views. The moment the Green Bond market started people wanted standardisation but it’s still difficult to compare apples to apples in that world.
This structured data piece I am referring to is that when issues are created everyone needs the same data to set up the instruments in their systems. This is way too manual at the moment. The current model is that an issue is announced, you may see that on Bloomberg or via email. Teams then manually input that data into their internal systems and make sure it fits in their systems. That is so backward in today’s $10trn market, to have somebody manually keying in data is just insane. It needs to be copied across and the only way you can do that is to have structured regularised data that comes in a certain format and we just don’t have that because people have differing views and opinions on it. That [structured regularised data] would truly benefit everyone.
That does not sound like a big technology ask?
The technology ask is the easiest thing going [laughs]. It’s actually getting everyone to agree on the fields. There have been attempts at it. In the European IG space ICMA had 24 fields they would like to receive and then it changed to 21 fields. That is only for European IG, does not apply to supranational bonds nor to the EM space so it’s awkward.
For allocations the market practises differ between IG, EM and Supranational. Trying to get any consensus is back to “The Camel is a horse designed by a committee” problem. People want different things and it’s very, very difficult to coalesce to a standard.
What will be the impact of the various Central Banks unwinding their QE policies? How will that drive innovation and change in primary and secondary bond markets?
The primary market has been the big player in town in terms of liquidity. All of the funds that are looking to purchase Fixed Income have had to come to the primary markets to get it which is why you see these multiple over-subscriptions as people chase getting liquidity. There is order inflation for sure in these order books. If we start to see greater liquidity in the secondary market as Central Banks offload positions that could mean we start to see less primary issuance. If the interest rate environment is going up and some of the old very low coupon bonds are underperforming then there is an opportunity for issuers that don’t need that much debt to buy-back through open-market repurchases or tenders. There will be plenty of work to keep the syndicate desks and DCM bankers busy, it’s a question of where the end investor is able to find that liquidity best – is it in the secondary markets or does it remain in the primary market?
I keep a list of Fixed Income Electronic Trading Venues here. Last year I speculated that we had perhaps reached “peak-venue” as a number closed. For your niche of primary market, do you think the number of venues will go up, down or remain constant?
The primary market is fairly minimal [in terms of firms on the list], I think there is capacity for more. Look at primary market book building – there is DirectBooks and IHS Markit. On the secondary market side of things does it really matter if they can all work together? How many GUIs and secondary market providers does a trading desk really have? Lots I believe is the answer.
The second paragraph (biography) was supplied by Bond Auction as was the picture of Spence. This interview was conducted remotely over a Zoom call and transcribed by Alignment Systems. No payment was asked for or received either way.
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