We asked the buy-side traders we have profiled on The DESK for the past ten years to discuss the biggest changes they thought had affected the market, the best outcomes that they had seen for traders, and the greatest changes that traders need to be aware of in the near future.
Historically, many changes in bond trading mirror the developments seen in equity markets in the 1980s and 1990s, says Dan Veiner, co-head of global trading, BlackRock (US$11.5 trillion AUM).
“Portfolio trading, also known as program trading in equity markets, has a history dating back to index arbitrage in the late 80s and the portfolio insurance trading linked to the Black Monday 1987 crash,” he observes. “Algorithmic trading has its roots in Thomas Petterfly’s typing cyborg, which was built to automatically interact with NASDAQ terminals in the 80s, before the days of application programming interfaces (APIs). These advancements are critical for today’s fixed income investors, supporting liquid, well-functioning markets.”
Yet despite their lineage, their impact on bond trading has followed a significantly different path to that seen in the stock market.
Dwayne Middleton global head of trading for fixed income at T. Rowe Price (US$1.79 trillion AUM) says, “The most unexpected development of the last decade was the swift divergence from the anticipated simple ‘equitisation’ model for fixed income. At one point, 200 platforms were trying to electronify bond markets. Astute market participants realised the complexity and unique path of the fixed income market evolution.”
“The writing was on the wall in bond trading,” adds Lynn Challenger, global head of trading at UBS AM (US$1.7 trillion AUM). “Electronification, algo pricing and the venue dominance. We have seen this play out in every market and this past decade it was the bond market’s turn to evolve. What I am surprised about in the bond market is the lack of things that have not changed.”
There were also expectations around the outcomes of market evolution which have been challenged, says Lars Salmon, head of fixed income trading, EMEA, Fidelity International (US$817 billion AUM).
“When electronification accelerated, including automation, and multiple trading venues started competing with each other, the prospect of cheaper execution, not just in terms of bid/ask but in terms of fees/implicit venues fees, was probably a widely held view,” he notes.
Several unexpected aspects of the market changed considerably, and these have altered market structure and liquidity profile considerably.
“While the electronification of bond markets was beginning, the comprehensive transformation of market structure emerged through several factors: the significant shift of inventory from sell-side to buy-side institutions; the acceleration of dealer automated market-making; and the emergence of a sophisticated exchange traded fund (ETF) liquidity ecosystem and third-party pricing infrastructure,” says Middleton.
Points that have not changed, Challenger notes, are the use of one-sided request for quotes for most fixed income securities types, the lack of derivative product offerings in credit, and the lack of a consolidated tape in Europe.
“I would have thought that we would have a lot more [credit] index derivatives traded liquidly in the market,” he notes. “We are now seeing the exchanges take another run at this product but let’s see if the market uses them.”
He also expresses shock at how slow moving the European consolidated tape is.
“One would think transparency would be mandated by regulators,” says Challenger.
Salmon adds that the net impact on costs of trading have not been realised.
“While bid/ask has probably generally benefited somewhat – although ultimately still much more heavily influenced by the market/liquidity environment – costs related to transactions have not really,” he says. “Business appears to remain captive to a significant degree with integration costs – order management systems (OMSs), different FIX message fields – and limited choice for certain instruments and convoluted pricing arrangements playing a role.”
Even for trading platforms, some services and tools have outperformed relative to expectations, making it hard to pin down the most unexpected outcome.
“It’s a tie,” says former BlackRock trader Iseult Conlin, now managing director, head of US institutional credit, Tradeweb (US$2.35 trillion ADV in October 2024), “The growth and positive liquidity impact of portfolio trading and the proliferation of accurate composite pricing data for corporate bonds.”
The effect of exchange traded funds
The exchange traded fund ecosystem that Middleton referred to is an underpinning of many new advances. When banks began selling off their index businesses in the mid-2010s, they were picked up by multiple firms and index tracking ETFs continued to proliferate.
Veiner says, “Fixed income ETFs have grown significantly over the last decade, with US-listed fixed income ETF assets reaching US$1.69 trillion and global assets surpassing US$2.4 trillion. This rise has unlocked portfolio and algorithmic trading in the bond markets in a significant way.”
“There are a lot of very good changes for the buy-side, but I would have to say the number one is the improved liquidity which was derived from the inventory management capabilities of ETFs,” says Challenger. “The ETF structure enabled both tighter pricing on single bonds, but also enabled Portfolio Trading. Two massive leaps forward in price improvement and efficiency.”
Veiner adds, “The velocity of fixed income ETF trading and arbitrage by proprietary trading firms and banks has enabled greater liquidity for single name bond markets. It has also spurred growth in new segments of the options market, as proprietary trading firms can now make continuous exchange-listed options markets for fixed income ETFs using their existing infrastructure, creating a more robust derivative ecosystem.”
“Ten years ago, I was sceptical about the liquidity transformation that ETFs could facilitate and doubted that these products could perform successfully through extreme points of market volatility,” says Matt Howell, global head of derivatives and multi-asset trading solutions in Global Trading, T. Rowe Price. “I think the last 10 years have demonstrated time and time again that view was incorrect and ETF’s have successfully transformed the way that the bond market functions. They have impacted almost every aspect of trading from growth in liquidity provision, increase in program trading, explosion in electronic trading and an incredible range of tools for expressing increasingly nuanced views.”
This has enabled a considerable facility for electronic market makers, notes Sharon Ruffles, head of fixed income dealing EMEA, SSGA (US$4.3 trillion AUM),
“The increase in electronic trading, particularly post Brexit, has been significant as has the increase in the various trading protocols available such as portfolio trading, auto execution, request for market, and all-to-all trading,” she says. “But I think the most significant change has been the rise in liquidity provision from the non-bank liquidity providers. They have plugged a liquidity gap left by the reduction of bank balance sheets following the increase in regulation post global financial crisis.”
Technology enabled trading, supported by the virtuous circle of data, feeding automated trading, and the increased transformation of less liquid bonds into more liquid ETFs is expected to continue, but there is room for even greater innovation.
“We will continue to see new market entrants coming in, in the vein of ETF liquidity providers increasing their market share,” says Cathy Gibson, global head of trading at Ninety One (US$161 billion AUM). “That’s not to say banks are going to be disenfranchised; there’s room for everybody. The big unknown is what artificial intelligence does in this space, whether that means more strategies from an execution point of view, or new investment strategies entering the markets based on AI platforms, and what that does to liquidity. I’ve got to assume even five years ahead, that AI is going to have a significant influence in what liquidity patterns look like.”
Nick Greenland, senior VP for business development at Axyon AI, and former global head of broker/dealer relations at BNYM Investment Management (US$2.1 trillion AUM), also notes this potentially disruptive but transformative technology could deliver massive change.
“I would expect the next decade will see a step change in the further application of a “fly-by-wire” use of technology across the buy side from the front-, to the middle- and back-office,” he says. “There is a lot being written about AI, both generative and predictive, at the moment, it remains to be seen where there will be critical mass and where the greatest value can be derived. As with many seismic changes, when you are at the coal face, the changes can seem slow and small and it is only when you look back or helicopter above do you see the real movements.”
Positive evolution
Buy-side trading desks have seen a number of advantages emerge from this evolution in market structure.
“The most beneficial developments for fixed income buy-side traders have centred around three key areas,” says Middleton. “Adaptability; embracing technological change and implementing diverse trading protocols and automated workflows. Data Integration; successfully incorporating and using multiple data sources for better decision-making. Finally, trading protocol diversification; leveraging expanded instruments like ETFs, credit indexes default swaps (CDX), total return swaps (TRS), and portfolio trading for more efficient risk and exposure management.”
The improved access to market data and the enhanced quality of that data has allowed the buy side to increase usage of electronic trading platforms and expand the scope and sizes done via automation, Joeri Wouters, fixed income dealer at KBC (US$366 billion AUM), notes.
“This is not just referring to the increase in trade data resulting from the implementation of MiFID II but also to the adoption of new platforms like, for example Neptune, that allowed for a better distribution of axes,” he says. “These developments led to an increase in liquidity, a reduction in transaction costs, and an overall decrease of operational risks.”
Matt McLoughlin, chief commercial officer at Liontrust, (US$28 billion AUM) says, “The adoption of data, automation tools and now AI-driven analytics has had the most positive impact, enabling buy-side traders to analyse markets faster, optimise trade execution, and enhance portfolio strategies. These tools provide real-time insights, automate routine tasks, and improve decision-making by identifying market trends, liquidity opportunities and pricing inefficiencies.”
“One of the most positive impacts for the buy side traders has been the growth of electronic trading platforms and the ability to automate some of the workflow,” adds Louise Drummond, global head of execution at abrdn (US$627 billion AUM). “This has streamlined investment processes and facilitated better access to liquidity globally, freeing up the trader’s time to concentrate on more complex trades and strategies.”
McLoughlin concurs, noting, “By reducing reliance on manual processes and widening the types of counterparties you can interact with, we have increased efficiency and allowed traders to focus on strategic opportunities and adding alpha, which is crucial in an increasingly competitive environment.”
The focus on trading workflows and electronic execution has brought other benefits for buy-side traders, says Howell.
“It has allowed desks to scale much more efficiently, opened up options for execution management systems and transformed liquidity provision,” he says. “Combined with some of the improvements in market transparency the bond market is a very different place from a decade ago.”
Frans De Wit, head of trading at PGGM (US$272 billion AUM), agrees that the European transparency regime has been a real boost. “It attracted alternative liquidity providers triggering banks to up their auto quoting capabilities, and it accelerated all-to-all trading,” he says.
Asked about the most positive change for traders, Conlin believes it is hard to differentiate between the benefits from better data and specific trading protocols.
“It’s a tie,” she says. “The growth and positive liquidity impact of portfolio trading and the proliferation of accurate composite pricing data for corporate bonds.”
Drummond says. “[Portfolio trading] has enhanced liquidity to the buy side when needed, allowing increased speed to market and the ability to price a large basket of bonds.”
“It is hard to get past the materially increased scale that has been created by electronification, automation and even new protocols, such as portfolio trading,” concurs Salmon.
Gianluca Minieri, CEO of Amundi Intermediation Ireland (US$2.32 trillion group AUM) also agrees, adding, “For an asset manager of our size portfolio trading has significantly improved our ability to move large, and small but across many names, quantities of risk quickly and efficiently either in real time or versus predefined benchmarks to mirror fund official pricing times. In particular portfolio traders streamline portfolio rebalancing, inflow/outflow management, and exposure adjustments in a timely fashion. What was once a slow process spread across many individual transactions has been transformed totally allowing traders to focus on more challenging trades.”
This transformation has not stopped – there is clearly more runway for portfolio trading execution to grow as Yannig Loyer, global head of markets and liquidity solutions at AXA Investment Managers (US$891 billion AUM) believes.
“We did not expect the execution via PT to expand so much and become such a market standard,” he says. “We feel this is one of the biggest changes in the market structure that occurred within the last few years. And all actors – buy side, sell side, platforms – are currently maturing their workflows on PTs, be it for pre-trade, pricing, etc.”
Drummond says, “According to Barclays research in 2024, a new portfolio trade in the US hit the TRACE tape every seven minutes, ten times faster than 2018. The technological advancements in banks’ abilities to price at speed large transactions has contributed significantly to this growth.”
The speed at which traditional dealers have adapted to support this change has been admirable and, while success has been far from certain or linear, it is notable that buy-side desks do continue to look to their sell-side counterparts for primary support.
The changing role of the sell side dealer In the face of greater competition from electronic liquidity providers, potential intermediation from trading platforms, David Walker head of fixed income dealing at M&G Investments (US$438 billion AUM) notes that banks’ continued willingness to price risk has the most positive effect on their clients.
“Buy-side desks do not function efficiently without the street’s ability to price risk,” he says. “Increased algorithms will continue to evolve in fixed income as smaller trades can be priced with ease and the algo pricing continues to help with large tickets, feeding into efficient and aggressive portfolio trading. Evolution of trading venues has improved the toolkit and efficiency for the buy-side desk. Electronification of the primary market from order building to allocated fills should be here, hopefully we can get there in the next year as this is the goal of the buy side.”
This is backed up by several other On The DESK stars including Conlin, Challenger and Salmon.
“After a couple of years of ‘goldilocks’, market liquidity in terms of bid/ask is probably as good as it can be, given the regulatory and wider environment,” says Salmon. “And while I would consider it likely that algorithmic/low touch liquidity provision will hold up better than the last time we had a major shock to the system during Covid, it is on the other hand clear to me that we will once again end up in an environment where only a few market makers are going to be able to provide reasonable liquidity, and relationships will once again matter more than anything else.”
Awareness of the positive liquidity picture is also top of mind for Minieri, who observes that trading protocols tested in peace time need to hold up in a time of war as well in order to be fully proven.
“Clearly portfolio trading works particularly well when the market is functioning normally and is not experiencing regular sharp ‘shocks’,” he says. “It remains to be seen how the protocol works when the markets are under consistent stressed conditions. However, we notice more bonds trading and printing that perhaps would have traded much less frequently if not for PT protocol. Therefore, providing a more accurate measure of where bonds should be trading and adding to an overall improving liquidity environment in my view.”
The upshot for future markets
With better data, a wide range of counterparties, more protocols to use in order to manage execution, traders have a number of reasons to feel positive about future market functioning, if these mechanisms prove resilient.
Nevertheless, there are a number of changes and circumstances that traders will need to manage and navigate, and their effect will depend on the how they are delivered.
Walker observes that as dealers adapt, the way they support liquidity and data provision is also likely to evolve.
“Global banks are changing to more centralised risk models globally, allowing portfolio trades to be absorbed and hedged with greater ease,” he says.
“This may affect line traders over time as larger risk transition is focused through portfolio trading rather than single line execution. Increased transparency in Europe may also change behaviours, we will have to wait and see.”
Juan Landazabal, investments COO at GAM International Management (US$22 billion), is cautious about the implementation of that regime,
“Excessive bond transparency might impact future bond market liquidity negatively, but on the other hand, the consolidated tape [in the UK and Europe] should have a positive effect,”
Ruffles explains how disclosure can be harmful, “Trade transparency and the introduction of the consolidated tape in the UK and Europe may impact liquidity provision, as market makers assess the impact of increased availability of price information across the market.”
The expected implementation of the consolidated tape and the calibration of the enhanced transparency regime in Europe are also top of mind for KBC’s Wouters.
“The consolidated tape should level the playing field between different market participants by improving the access to trade and quote data, and together with the enhanced transparency regime this could attract new participants to the market who feel more confident entering the fixed income markets, increasing the overall liquidity,” he says. “However, there could be adverse effects on block trades or in the less liquid areas of the bond market, where too much information or information made public too quick could lead to dealers feeling either more reluctant to price, or price wider. It will be key to find the right balance between improving market transparency and efficiency, but also protect participants from the risk associated with faster exposure of their transactions.”
The unknowns that need managing
Several other macro factors are potential concerns, or dynamics that traders need to consider as longer term strategic issues.
“I think that the market reaction to exogenous events has at times been more muted than one would have anticipated given the severity of the event,” says Ruffles. “Geopolitical events have not had the market disturbance impact we may have seen in the past. A reason for this could be the support the market has seen from central banks during times of crisis. Have the markets become complacent in believing central banks will always be there to provide the back stop?”
Greenland adds, “Post GFC there was a lot of bank de-leveraging of balance sheets, but this has been quietly changing with some of the big liquidity providers building back up their fixed income business for clients they are most focussed on partnering with.”
There are also worries about the level of indebtedness seen in private and public markets. While the structural changes to trading and risks management enforced after the global financial crisis have reduced the likelihood of leveraged systemic risks, the sheer scale of borrowing is a major issue.
“We are witnessing unsustainable deficits in developed countries, including in the US,” says Veiner. “The increasing issuance of long-duration treasuries is particularly noteworthy. Net debt service spending is projected to surpass US military expenditures and could eventually become the largest spending category. If these trends continue, the liquidity of government bonds, particularly US Treasuries, could be of rising concern.”
As buy-side firms support direct lending, which is largely happening in the lower rated areas of debt markets, that will distort public market activity. If activity were to expand significantly, it might even affect secondary markets.
McLoughlin says, “The rise of private debt markets and non-bank lenders could significantly impact liquidity by diverting capital from traditional bond markets. While this shift offers more tailored funding solutions, it reduces transparency and standardisation, potentially increasing transaction costs and volatility in public markets. During economic stress, the lack of liquidity in less actively traded securities could amplify systemic risks, challenging market stability.”
Major changes to market structure have been posited by authorities, such as clearing in US Treasury markets, and enhancements to the European Union’s Capital Markets Union. At a micro level, rules have come in determining what constitutes a trading venue in over the counter markets such as credit.
Drummond says, “Challenges could be changes to regulatory landscape that fragments markets and reduces risk appetite from counterparties.”
Howell adds, “Regulation is always a big influence on liquidity and I don’t think this is going to change. Levels of bank capital, pre and post trade transparency and the push for more clearing all have the potential to influence market liquidity.”
Challenger posits that streaming liquidity between dealers and clients still has further to go, and may create new liquidity channels.
“We are very early days in this revolution, but it will evolve over time and be the most impactful driver of market structure change,” he says.
Yet a key aspect of bond markets – their difference to equity markets – is still perceived as both valuable and worth protecting. Moving away from trading large orders on risk – non-comp – would be a loss to the trader’s abilities.
“The risk of equitisation of the fixed income market is one of our main concerns regarding access to liquidity,” says Loyer. “In particular, we think that the capacity to trade blocks without any information leakage in the market is key to preserve access to liquidity for institutional actors – and we think that in cases of market events this can lead to significant liquidity squeeze.”
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