Dated fixed income markets are set to undergo a rapid technological transformation. But it is from a low bar, with fixed income 10 to 20 years behind other markets when it comes to technology.
The dated nature of fixed income technology platforms is reflected in stack fragmentation and system interoperability, manual errors and processes, and data access. But a recent study by Coalition Greenwich in partnership with FlexTrade has found that thanks to innovation such as AI and automation, fixed income trading technology is set to evolve at a faster pace in 2024. Coalition Greenwich interviewed 70 US-based buy-side professionals in fixed income front-office roles to determine drivers and inhibitors of automation, execution management system (EMS) adoption and increased electronification in fixed-income trading.
Audrey Costabile, author of Fixed-Income Trading Technology on the Verge of Change, told The DESK, “Historically, fixed income markets didn’t require as much technology as they do today. For instance, there weren’t as many data sources to contend with and calling in orders over the phone worked. This is no longer the case. Today, the US market alone has no fewer than seven notable corporate bond trading venues, almost as many providers of evaluated pricing, not to mention the dozens of dealer axes and runs that need consolidating and analysing.
“Liquidity and data fragmentation were much less of a problem as recently as five years ago and, as a result, the ROI of an EMS and related infrastructure is finally starting to make sense. When the market was less fragmented, EMSs had less work to do and were less efficient,” Costabile added.
Michael Kovach, head of fixed income sales at FlexTrade, told The DESK why fixed income is so behind when it comes to technology adoption.
“The fixed income market is rife with disparate sources of liquidity. This fragmentation has led to non-standardised processes for sourcing, managing, and executing fixed income instruments in an OTC market. Each asset class within fixed income has idiosyncrasies and nuances as to where and how they are traded. Oftentimes the matching of contra interest (buyers vs sellers) is more challenging than in other asset classes given the sheer number of instruments, corporate bonds for example, that are available. As a result, technological solutions have been hindered by all the moving parts and challenges mentioned above. However, over time and with lots of innovation across market participants, we are seeing growing interest in FI EMS technology as a potential solution.
“The fixed income market has slowly, not suddenly, been adapting to electronification over the last several decades. As firms have gradually accepted and adopted further electronification, venues and dealers have enhanced their technological capabilities, opening up new opportunities for market participants. Over the last several years, we’ve begun to see the trend accelerate with a proliferation of market data providers and an eagerness of venues, dealers, and algo shops to integrate directly with EMS providers for the benefit of their mutual clients. This has fostered improved opportunities for integration and cooperation amongst all FI market participants,” Kovach added.
Fixed-income traders are looking ahead to core execution management system (EMS) functionality improvements and are keen to adopt more advanced trading techniques, the study found.
Currently, a very small percentage of fixed-income investors use an EMS to transact corporate bonds, US Treasuries, municipal bonds, and other fixed-income securities. Despite the limited adoption today, more than 50% of the buy-side traders participating in the Coalition Greenwich study say they have plans to adopt an EMS for investment-grade corporate bonds and on-the-run Treasuries, and nearly half expect to be using an EMS for high yield and off-the-run Treasuries.
Tables-stakes features of the EMS, such as staging connectivity to venues, an aggregated view of market data, and bilateral connectivity are more strongly desired and needed to navigate today’s markets, participants said. Traditional means of risk transfer, including voice and chat, are still dominant in fixed-income trading.
In Q1 2024, 44% of investment-grade bonds (IG) and 29% of high-yield (HY) bonds (on a notional basis) were traded using electronic means. Study data suggests the shift to more electronification is motivated by both asset class “readiness” as well as improved attitudes toward e-trading. The journey to more electronification is very different across participants, with most embracing at least some e-trading in their workflows today.
Nearly all study participants said they have technology pain points, often running too many applications simultaneously that can’t speak to each other, while trying to collect and analyse data from numerous sources. Despite these inefficiencies, factors including cost and quantifiable return on investment (ROI) still hinder traders who are considering the adoption of new trading technology.
©Markets Media Europe 2024
