March 14, 2022
Vice-President, Fixed Income and Data Services, APAC
The digitization of fixed income trading is adapting to less liquid markets, with far reaching implications for the Asia-Pacific.
Having worked across Asia and Europe for a U.S. company, I’ve seen clear trends in the way financial services technology is adopted. In Asia for example, global entities tend not to invest in the latest technology unless their counterparts in Europe or the U.S. have done it first. It’s a dynamic which makes sense in a region where bond markets are less liquid, and a smaller market size makes investment in new systems harder to justify.
Still, the adoption of electronic trading has leapt across the Asia-Pacific in the past five years. It’s a dynamic confirmed by a recent survey my colleagues and I conducted, speaking with almost 40 financial, buy-side and sell-side firms across Hong Kong, Taiwan, Singapore, Australia and Japan. Trading firms comprised over half of all respondents, and participants pointed to execution efficiency as the key benefit of electronic trading, followed by liquidity and transparency, then speed of execution.
Respondents said regulation such as the MiFID best execution had intensified digitization, with electronic trading venues proliferating across the region as new players tried to innovate the process. They noted the ease of protocols like Click to Trade for more liquid securities, alongside steadily decreasing voice/ chat trade volumes.
Yet hurdles remain. Several asset managers highlighted bond types which still cannot be traded electronically - and may never be - such as certain domestic currency bonds, emerging market corporate bonds or local sovereign bonds, and U.S. domestic bonds during Asian hours. They also pointed to larger ticket trades, credit default swaps, convertibles and green bonds as presenting a challenge.
The pace of innovation can also be perceived as an issue, with respondents noting some fatigue around the need to constantly re-learn new functions. Still, most underscored the need for additional functionality. Examples included the need for updated prices and inventory in real-time, a mechanism that would incentivize market makers to put up firm prices, and a common platform for the buyside to uncover liquidity at other buy side firms or investment banks.
Regarding analytics and transparency, they emphasized the need for pre and post trade pricing color, transparency across different platforms, and consolidated trade tape to drive closing prices and mark to markets.
More broadly, we see a misconception about the role of electronic trading protocols. Across markets such as the U.S. and Europe, they are increasingly seen as a way to free up resources so that traders and portfolio managers can focus on more value-added tasks and finesse new skills. In Asia-Pacific, there is some skepticism that certain protocols can be relevant to a fragmented and less liquid market, with the perception that only voice trading can work. Yet in a complex asset class like fixed income, electronification is unlikely to ever replace human oversight - rather, the huge proliferation of data demand new skills to analyze opportunities in the market.