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Bringing transparency to fixed income markets

Lynn Martin
Lynn Martin

President of ICE Data Services

Transparency is a key attribute of liquid markets. In the world’s most liquid market, U.S. equities, a proliferation of inputs received in microseconds help firms make sound risk management decisions. And in this market, significant transaction growth over the last decade has produced record levels of data outputs. This trend is true of all asset classes - as a market becomes more transparent, it becomes more liquid. And the effect of this liquidity is two-fold from a data perspective (1) more timely inputs for risk management decisions and (2) the frequency and volume of outputs related to that market increase.

Over the past few years, there are signs which point to increasing transparency in fixed income markets, which is a good thing given the diversity of market participants. For this asset class it’s not just about speed and automation, but data standardization and availability.

For fixed income managers, processing the sheer volume of information related to these securities has long been the biggest challenge. And that is one of the extremely unique attributes about this asset class. One equity security, for example, could have hundreds of bonds associated with it, each with a plethora of calculations, and unique terms and conditions. This created an opaque market structure, where information gained via professional relationships could spell a competitive edge.

Now, digitization is reshaping bond markets globally. Where credit analysts once sifted through long prospectuses to find terms and conditions of individual bonds, they now use databases to sort thousands of debt securities by specific risks at a keystroke.

Electronic trading platforms have liberalized markets and boosted transparency, a trend we have been at the forefront of driving since ICE’s creation. Traders can communicate with hundreds of peers simultaneously, and see bids and offers as they happen using a variety of protocols. In this increasingly open market, the ability to profit from information has been democratized.

A new competitive strategy

For traders, banks and asset managers, these changes demand a new competitive strategy.

The ability to quickly apply a proliferation of data to spot trading opportunities spells the strongest advantage in electronic markets. Increasingly, firms seeking to fill openings in fixed income are targeting job candidates with programming and coding expertise, and little to no trading experience - reflecting a desire to dynamically analyze big data sets in order to gain edge.

Market participants also face fresh demands. Regulatory and investor scrutiny of their fixed income execution programs means asset managers are focused on the most efficient ways to trade. Where banks have always supplied new bond issues to the market, they must now couple it with execution efficiency.

This has fed the rise of independent players that offer electronic marketplaces and hold extensive deal data for the market. In this new dynamic, system and human analyses can be combined to process and incorporate market data throughout the day, producing a continuous stream of fixed income evaluations. And as the quality of data advances to offer more market insight, cloud technology can help firms avoid costly infrastructure to store and access large data sets.

More broadly, billion-dollar bundles of bonds can now be sold in electronic marketplaces in single transactions, eliminating the need to negotiate over individual securities. The bulk of volume is still dominated by small trades -- 70% of U.S. corporate bonds traded each day are worth $100,000 or less, according to Greenwich Associates. In a push for efficiency, more asset managers are using continuous evaluated pricing to build auto-execution programs for small trades, allowing them to rely on fewer individuals to trade a wider range of products.

New markets, investor preferences…

Investor preferences are also driving change. A recognition that active investment often fails to add value, has fed the popularity of diversified low-cost products like exchange traded funds (ETFs), which have ballooned in growth. For example, one of the largest passive U.S. bond funds (iShares Core US Aggregate Bond ETF) has $66 billion in assets and charges just 0.05%.

Assets linked to bond ETFs are positioned to reach record levels - with some forecasts suggesting assets could double to $2 trillion over the next five years. This demand underscores the need for greater efficiency in the way these products gain market exposure, with authorized participants sending excel files to issuers in a drawn-out process of creating and redeeming shares.

This cumbersome process has seen the launch of products designed to improve the ETF creation and redemption process, such as ICE ETF Hub. This mechanism simplifies order entry, with centralized access to issuer data, and the ability to standardize the negotiating of ETF shares. This infrastructure will allow the market to continue to grow at the forecast pace with greater efficiency and less operational burden to the community.

Investor appetite is also feeding the rise of “attribute investment” - a dynamic where assets are chosen based on a set of pre-defined criteria such as environmental, social and governance (ESG) principles, which often require large volumes of securities to be screened. Here, platforms that combine portfolio analytics with pre-trade analysis and a range of trading protocols can support asset manager efficiency.

At a higher level, the ability of managers to accurately track a benchmark is crucial for passive asset managers, with real-time portfolio analytics and high quality data allowing index managers to minimize tracking error.

As advances in data and technology accelerate, resulting transparency means access to markets will continue to broaden. Against this backdrop, market participants who embrace tools that enable the quick application of data insights will be best placed to compete - and attract volumes from the rivals who lag them.

Our experts analyze key dynamics across the global fixed income, energy and sustainable finance markets.