As the final asset class to succumb to electronic trading, the fixed income market is slowly moving away from over-the-counter trading and towards a more centralized trading model—with the buy side’s wishes, aided by a regulatory push, for more transparency beginning to bear fruit.
Fixed income trading has, in the past, been big business for sell side firms who have generated vast profits from the opaque world of OTC trading. Electronic trading in fixed income is growing but the prospect of regulation has accelerated this trend.
The regulatory response to the global financial crisis is going to mean many fixed income products are likely to be pushed on to more standardized exchange-like venues and through centralized clearing in the not-too-distant future in a bid to reduce risk in financial markets.
Paul Squires, head of trading, Axa IM
“We are advocates of electronic trading in fixed income,” Paul Squires, head of trading at Axa Investment Managers in London, a French-headquartered buy-side institutional investor, told Markets Media.
“But I don’t think we will suddenly go from doing 95% of our flow with banks to suddenly doing it through an agency broker or software accessing order books—it’s not going to be that drastic. What I do imagine us doing is looking at order books to execute certain bonds and certain types of orders and that will hopefully have a positive impact on our trading performance for clients. The more volume that hits the order books the more they will attract—hopefully it becomes self-perpetuating in a positive way.”
But critics of the move by regulators across both sides of the Atlantic to better monitor the OTC derivatives landscape—in the form of Dodd-Frank, Emir and MiFID II—say that the inherent complexity of some fixed income products will not easily fit into a more transparent and heavily regulated equities-like trading model. The sell side are also fearful of reduced profits if fixed income trading moves away from the OTC sphere.
Many buy-side investors, though, will be hoping the expected sea-change in the electronification of fixed income trading will allow them to obtain more reliable price discovery and market data, as well as resultant reduced costs and more efficient markets—enabling them to strive for best execution, like in other asset classes such as equities.
“We have now set up our trading infrastructure to accommodate access to more order books—a structure type in fixed income which we see coming through,” said Squires.
“It is good for the evolution of fixed income trading. By that I mean there are risks if it is not done carefully. You absolutely need banks to provide liquidity in fixed income. That’s not going to change overnight. Equally, there is a place for different execution options for different strategies. Sometimes an order book will probably be a good way of executing your order. That enables retail and institutional flow to come together.”
The electronification of fixed income markets is also likely to open up the space to more retail investors as market data becomes more freely available and the market becomes more efficient and transparent.
Meanwhile, one provider of financial networks, TMX Atrium, has recently added connectivity to a trading platform for OTC derivatives products for interest rate swaps, which are an integral part of the fixed income market.
Inter-dealer broker Tradition’s Trad-X, a hybrid trading platform for OTC derivatives, can now be accessed through TMX Atrium’s co-located facility at the Equinix data center in Slough, just outside of London. TMX Atrium says its venue-neutral network allows customers to access multiple venues and markets in order to trade the full range of asset classes.
“The fixed income market is becoming increasingly electronic, which is creating renewed interest from participants looking for supplementary forms of electronic price discovery to complement their complex and varied trading strategies,” said Emmanuel Carjat, managing director of TMX Atrium.
“Adding Trad-X highlights the growing range of asset classes available across the TMX Atrium community. These asset classes include cash equity and derivatives, FX and commodities, as well as fixed income and derivatives, all of which demonstrate that we are committed to providing choice to our growing financial services community.”
Another platform, which caters to institutional fixed income traders, has also just been launched by New York-based software provider iTB Holdings that allows buy-side firms to connect to electronic fixed income trading venues of their choice.
Called iTBconnect, it promises to provide clients with the ability to access multiple fixed income venues through one customizable interface or API, resulting in increased liquidity, higher trading volumes and improved workflow efficiency.
"With dealer corporate bond inventories down by almost 80% since 2007, institutional investors are actively seeking new sources of liquidity,” said Michael Chuang, founder and chief executive of iTB. “This combined with the recent proliferation of new electronic trading venues has created a very fragmented market.
"Leading buy-side firms recognize the need for a technology solution for centralized access to these fragmented liquidity pools so they can get the best execution they need to remain competitive.”
