Machine Learning

Overbond Releases AI-driven Margin Optimization

Sell-side fixed income desks using the margin optimization add-on can optimize their hit ratio and triple the number of RFQs they are able to profitably respond to with full or partial automation

Overbond has released an AI-powered margin optimization add-on that fully integrates with its existing suite of AI-powered fixed income analytics. Traders using the add-on can optimize their hit ratio and triple the number of RFQs they are able to profitably respond to with full or partial automation.

The structure of fixed income markets has changed dramatically over the past decade. Secondary market liquidity has declined markedly due to new regulations that have led to increased capital requirements, reduced risk limits and increased costs for dealers.

New fixed income products, the emergence of electronic all-to-all platforms and non-dealer liquidity providers are creating new competition for dealers and increasing the pressure to reduce their response time to RFQs.

“It is difficult for sell-side fixed income desks to be profitable in this environment, so trade automation has become the industry standard. Traders are realizing that they can gain a competitive edge by augmenting their trading with AI. Of course, achieving an optimal hit ratio is a key part of maximizing P&L. With Overbond’s AI-driven margin optimization add-on, sell-side desks can respond to up to three times the volume of RFQs without incurring negative margin on those trades,” said Vuk Magdelinic, CEO of Overbond.

Overbond’s margin optimization add-on captures various margin optimization measures and converts them to one unified all-optimized distance. To train the model to the risk tolerance and execution style of the desk it calculates this optimized distance for all prior categories of RFQs processed by the desk, such as those that are accepted, rejected, covered and traded-away. Using this information, it minimizes the distance-to-cover at the point of execution of all new RFQs, based on the best executable price according to Overbond’s pricing model, COBI-Pricing LIVE.

COBI-Pricing LIVE has a refresh rate of less than three seconds, enabling sell-side trading desks to fully automate 30% of their RFQs and execute an additional 20% with trader supervision. COBI-Pricing LIVE allows traders to automate trade flow, improve liquidity risk, improve price monitoring and reporting, and respond to 80% to 120% more RFQs. With the margin optimization add-on, traders can maintain an optimal hit ratio and significantly increase desk P&L.

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