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Toronto-Dominion Bank is acquiring electronic fixed-income trading company Headlands Tech Global Markets LLC in an attempt to further expand into municipal and corporate bond markets as well as bring a higher degree of automation to its existing bond-trading platform.

Chicago-based Headlands owns proprietary trading software that facilitates the electronic trading of municipal and corporate bonds. All 15 of Headlands’ employees, including co-chief executives Martin Mannion and Matthew Schrager, will join TD when the deal closes.

TD had long intended to increase the efficiency of its fixed-income trading platform, which still relied on manual entries in order to execute trades. But the search for the right company to acquire took years, according to Moti Jungreis, vice-chair and head of global markets at TD Securities, who was instrumental in orchestrating the deal.

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“A lot of clients, as they were doing more business with us, demanded better execution. Our processes, to a certain extent, needed to be faster and more automated,” Mr. Jungreis said in an interview.

He said the bank started looking at their internal technological capabilities, including available artificial intelligence (AI) software, to see how it could streamline its fixed-trading operations.

“Headlands was already a leader in municipal-bond trading and had a very attractive return in [that segment],” he added.

Large banks both in Canada and the United States have for years been exploring ways to trade more competitively, amid the rise of quantitative-trading firms such as Jane Street Capital and Trumid, both of New York. Quantitative trading uses algorithm-powered trading methods that deliver quicker results to clients.

Some have poured money into developing in-house automated trading platforms and investing in AI expertise. Royal Bank of Canada , for example, in October, 2020, launched Aiden, an AI-based electronic trading platform that the bank says has been particularly effective in navigating pandemic-driven market volatility in a way that human traders simply cannot.

In September, 2018, Bank of Montreal acquired KGS-Alpha, an electronic trading firm specializing in the trading of U.S asset- and mortgage-backed securities. Just over a year later, the bank purchased Clearpool Group Inc., a New York cloud-based electronic trading platform, in order to boost performance in its equity trading division.

Headlands’ co-CEO Mr. Mannion said in a press release that his firm was confident its fully automated electronic trading in fixed-income products would complement TD’s existing business. The bank plans to eventually hire more traders to use the new platform.

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The acquisition comes amid a volatility-fuelled surge in revenue in the trading divisions of most major Canadian banks. National Bank , for example, saw its overall earnings increase by 37 per cent for the quarter ending Jan. 31, driven by the performance of its trading desk, which generated $393-million for the bank. Royal Bank of Canada, too, saw its capital-market earnings climb to a new record of $1.07-billion, mostly because of trading revenue. While TD’s capital markets revenue was up 25 per cent from a year prior.

Mr. Jungreis said the timing of the acquisition was not connected to how the trading divisions of banks have been performing well over the past two quarters. “We always intended to move from a traditional trading model to an automated one.”

TD did not disclose the purchase price for Headlands, though it said in a press release that it expects the transaction to have “minimal impact on capital.” This is the second acquisition TD has made in 2021; in January, it announced it was buying Wells Fargo’s Canadian direct equipment business.

“Following this transaction, we believe TD has enhanced flexibility, including potential M&A, to pursue acquisitions in the U.S. that could include personal and commercial banking, wealth management or asset base (e.g. cards, other personal, commercial) given their excess deposit base,” wrote Scott Chan, an analyst with Canaccord Genuity Corp.

The transaction is expected to close in mid-2021, subject to regulatory approvals. TD Securities served as a financial adviser to the transaction and Evercore advised Headlands.

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