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The future of fixed income is electronic

The transition to electronic trading is gaining support in fixed income markets, but challenges remain both globally and regionally. Three ICE webinars provide insight by looking deeper into fixed income electronification trends across geographies.

There are advantages to greater automation for fixed income markets. New momentum, spurred by innovation and a reaction to volatility in the early days of the pandemic, is helping to accelerate adoption.

Yet barriers to electronification remain, including issues with obtaining market data, liquidity, bespoke products and high costs to implement the necessary technology.

In three ICE webinars across the United States, Europe and Asia Pacific, panelists delved into the global trends and localized topics around fixed income electronification.

Electronic trading has been gaining traction alongside a steady rise in the adoption of artificial intelligence and algorithmic trading. Many traders now view electronic trading as complementary to their work, with tools that can help spot trends and potentially increase efficiency across the trade life cycle.

However, panelists observed that not all fixed income products have been able to transition to electronic platforms at the same pace, despite apparent demand from participants. Products that are more liquid with verifiable data are experiencing significant growth through electronic trading. The complexity of some fixed income products can put limits on automation, and for those products, request-for-quote (RFQ) remains the dominant protocol.

Fixed income markets vary across regions, adding to the electronification challenge. For example, panelists estimate that in APAC only ~5-10% of fixed income markets are electronic. They point to market fragmentation and the illiquidity of bespoke products as the biggest impediments to the migration to electronic markets.

European market participants said that the main impediment is obtaining timely, high-quality data on a platform. Contributing to this is a lack of standardized protocols, which currently differ between trading desks and geographies.

In the U.S., electronic volume has been steadily growing with the greatest impact on corporate and municipal bonds. New regulations, an explosion of new datasets and demand for greater efficiency are driving growth.

Webinar panelists said electronification improved pre-trade workflow and trade processing. They acknowledged that electronic trading worked well for more standardized products such as corporate and municipal bonds. This has seen a virtuous circle of electronification that may lead to more liquidity, bigger and deeper markets and broader market access.

Human expertise is expected to remain an integral part of global bond markets: the complexity of certain fixed income transactions and large trades is still expected to demand human judgment.

New regulations, an explosion of new datasets and demand for greater efficiency are driving growth.

Fixed income electronification has enabled the advent of new protocols and modes of trading.

One is portfolio trading, which comprises ~5% of total bond market trading volumes, about three times the amount in previous years, according to Trade Reporting and Compliance Engine (TRACE) estimates. Portfolio trading allows large portions of assets to be bundled and traded to mitigate risk. This can help to minimize information leakage, improve liquidity and make it easier to rebalance portfolios. As part of the electronification of portfolio trading, exchange traded fund (ETF) issuers and other fund managers can automate their rebalancing processes.

Another trend is algorithmic trading, with the skills to support it in high demand from banks and asset managers.

The pace of tech adoption varies widely across markets. When market fragmentation is minimal, webinar participants say barriers to expanding electronification are considerably decreased. An explosion of data that typically accompanies more liquid markets is helping to advance transparency. Ultimately, access to more high-quality data can facilitate increased electronification.

The electronification of fixed income markets is unlikely to replace human expertise, but technology can continue to boost efficiency, freeing time for more value-added tasks and may lend a competitive edge to early adopters.