Electronic trading - where transactions are carried out using software on online platforms, rather than via dealer-client “voice” trades - can carry major benefits for the $100 trillion-plus world of government and corporate debt.
Regulations such as MiFID II in Europe to improve transparency have also boosted electronic trading.
For one, traders executing deals can quickly gauge market depth on their screens, freeing time for more complex trades. For another, it offers lower costs for investors; two dealers estimated it to be 10%-30% cheaper than traditional voice trades.
Nonetheless, while most bond industry players acknowledge that much of the future is digital, many have been reluctant to go fully electronic.
Around 45% of the European fixed-income market is electronically traded, versus 38% a year ago, consultancy Greenwich Associates estimates. In the $6.6 trillion-a-day currency market, 90% of spot trading is conducted digitally.
However the COVID-19 crisis is accelerating the electronification of the bond market, according to industry players.
Many such as Tony Rodriguez, U.S.-based head of fixed income strategy at Nuveen Asset Management, said a need for greater liquidity had boosted electronic trading activity.
“A lot of trades were pushed electronically because of greater liquidity and transparency - so the crisis pushed what was already in place,” he said.
Andrew Falco, global head of FX and fixed income trading at Fidelity International in London credits electronic trading with allowing connectivity in a market suddenly dispersed by remote working.
This kind of technology enabled the transition from working in an office to working from kitchen tables, he told Reuters.
He said some lessons had been learned about this last year when Fidelity’s Hong Kong team struggled to work in the office because of the unrest roiling the city.
“So for us in 2020, we finessed the e-trading 凯发真人在线home set-up and ensured it worked well, whether it was in HK, Shanghai, Dublin or the UK,” he added.
Graphic: etrading impact on bond market liquidity - Greenwich, here
For the banks who provide dealer and execution services, though, the electronic shift may be eating into fixed-income revenues; during the March quarter, earnings from bond trading at the world’s biggest 12 banks remained below levels seen in 2014, research firm Coalition calculates.
But they too are accelerating the push to digital services, particularly for the automation that helps them when volatility spikes.
JP Morgan, for instance, uses an algorithm to help generate price quotes on its forward FX platform, which includes bonds, fielding “hundreds of thousands of enquiries” and transacting “thousands of trades a day” during the crisis, said Tom Prickett, co-head of EMEA rates at the bank.
Another big player, Goldman Sachs, said clients ramped up calls for the electronification and automation of companies’ bond sales, until now a slow process conducted manually.
“The crisis revealed some of those shortcomings in bright lights,” said David Wilkins, Goldman’s head of FICC execution services in EMEA.
Investors and traders acknowledged that digital technology had been a saviour during the pandemic, a view expressed across a host of industries.
“Imagine something like this happening 25 years ago, when emails didn’t exist, electronic communication was not really there,” said Zoeb Sachee, head of euro linear rates trading at Citibank who oversees government bond trading in European markets.
But, for the foreseeable future at least, the bond market is likely to encompass the old and the new: technology as well as traditional trading models based on dealer-client relationships.
Traders of European investment-grade corporate bonds during the crisis often negotiated deals by phone before using a platform to settle, according to an International Capital Market Association (ICMA) report.
“Bond markets are very much relationship-driven and I don’t see how that goes away,” said report Andy Hill.
This was echoed by Falco at Fidelity.
“The view that we felt as a team was that we would use technology where we had confidence in the price that we could see on the screen, and when we didn’t have the confidence in the price, we would execute manually.”
Graphic: Change in use of e-trading protocols during the crisis - ICMA, here
Reporting by Dhara Ranasinghe and Saikat Chatterjee; Graphic by Ritvik Carvalho; Editing by Sujata Rao and Pravin Char