Sell-side fixed income participants are witnessing the deepening electronification of fixed income markets, according to a report from Acuiti in association with valantic FSA.
As more firms connect to electronic platforms and look to automate their workflows, the report considers what shape this is taking, considering the adoption of portfolio trading, electronification of repo markets as well as the effect the move to cross-product sales is having on fixed income teams.
Andy Browning, head of electronic trading at valantic FSA said: “Sell-side providers mainly attribute client interest in portfolio trading to a desire for efficiency, as the buy side seeks to create, execute and optimise portfolios faster and with less headcount and reduced transaction costs.”
More than 70% of respondents in the report said they have seen an increase in demand for greater portfolio trading functionality in recent years.
However, a large majority (85%) of the respondents said they execute under half their electronic activity via portfolio trading, with the majority done through other protocols like RFQ. Interviews supporting this report suggest that clients are not treating electronic protocols as an ‘either/or’ choice.
The report found that market participants are increasingly using repo to navigate fixed income markets in 2023. ICMA’s December 2022 survey of the European market revealed a new high in activity, with the total value of outstanding repo contracts on the books of the 61 firms that participated in the survey reaching €10.374 billion.
The report reflected this, with 67% of respondents seeing clients make more use of repo markets and 66% seeing customers predominantly access repo markets using both voice execution and electronic platforms. However, 86% indicate that more repo volume is shifting toward electronic platforms.
Acuiti managing director Will Mitting said: “It is clear that momentum is growing, with 86% of the network reporting a growing amount of repo volume moving to electronic platforms and the increase in electronic platforms becoming available to participants.”
When it comes to artificial intelligence (AI) and machine learning (ML), 86% of respondents anticipate these technologies will drive the most efficiencies in pricing, followed by chatbots for internal processes and algorithmic execution (both 57%).
Regarding mergers and acquisitions of fixed income service providers, the majority of respondents (75%) suggested that consolidation of third-party software providers is increasing concentration risk and limiting choice.
On the major limiting factors in their relationship with tech vendors, regarding their ability to add value to their workflows, 84% said that as they are closed systems, they are hard and/or expensive to integrate into their ecosystems.
A majority, 73%, of respondents said their headcount will remain the same this year, perhaps reflecting the fact that 67% said their trading workflows performed “seamlessly” during the recent period of volatility.
The fact that 58% were quite concerned about the market’s ability to absorb moves in fixed income that were experienced during the recent volatility is reflected in the percentage of respondents that were optimistic about their business performance in Q1 2023. The FSA Sell-Side Fixed Income Sentiment Index suggested that 47% were optimistic, down from a high in Q2 2022 of 60%.
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