Fixed income platform market reaches saturation

With countless fixed income initiatives and platforms readily available and growing, industry experts agree new platforms will not be able to compete.

By Hayley McDowell March 10, 2016 11:20 AM GMT

The growth in fixed income platforms will grind to a halt leaving behind only a few in the market, according to industry experts. 

As the market is now over-crowded with fixed income initiatives and platforms, industry experts believe any new entrants are unlikely to succeed and many existing platforms will disappear in the coming years. 

Stu Taylor, chief executive at Algomi, the fixed income information network provider, highlighted that any new platforms will now face stiff competition.

He said: “Clearly, there is a saturation in the electronic market, but new players will have to compete with firms like Liquidnet, a very well-funded platform, which has the time to further develop.”

Carl James, global head of fixed income at Pictet Asset Management spoke to The Trade at the FIX Trading EMEA conference in London in March, about the issues surrounding fixed income platforms.

James, who is also co-chair of the EMEA investment management subcommittee at FIX Trading Community, explained some of the reasons why some platforms may not survive.

He said: “There approximately 98 fixed income platforms or initiatives in the market with a wide variety of concepts and protocols, such as dark pools, time-based auction processes, synthetic central limit order book, all of which cater for a variety of fixed income instruments.

“It is clear to me that the current 98 will eventually become a much smaller number. This could be for a variety of reasons; the concept did not catch on; not enough customers; poor marketing; running out of money.”

The fixed income market is undergoing dramatic changes as investors are looking to apply a new approach when attempting to enhance returns.

The Trade asked Russell Dinnage, senior consultant at GreySpark Partners, about the forces behind the shift in the fixed income market.

He said: “There are two fundamental forces challenging the structure of trading in the fixed income market for buy-side firms, sell-side banks and non-bank liquidity providers in 2016: the depth of liquidity for government bonds, corporate credit and single-name CDS and the ability to form transparent prices for block-size corporate bonds trades and for block-size trades in off-the-run, non-US or Euro-area government bonds and single-name CDS.” 

Regulatory forces

Regulation has also played a part, as Dinnage continued: “Basel III capital constraints are forcing the structure of the fixed income market across all types of instruments to move away from a centralised model focused on the ability of banks to warehouse risk on their balance sheets, and thus provide depth of liquidity and readily-available reference pricing both on an OTC basis and within dealer-to-client voice and electronic execution trading venues, toward a decentralised structure.”

Additional post-financial crisis regulations like the US Dodd-Frank Act and Mifid II in the EU are encouraging an electronification of the fixed income market.

Dinnage explained the ramifications on trading platforms following this electronification: “…the structure of the market will shift toward a more decentralised model in which large buy-side firms can become bonds and swaps liquidity providers in their own right.

“However, in order for this shift to occur, it is also important for large buy-side firms to increase the sophistication of their fixed income liquidity aggregation tools."

Mark Watters, director at AxeTrading, a fixed income solutions provider, drew similarities from the equities market when he discussed the changes. The equities market also experienced a saturation of platforms post-Mifid I.

Watters said: “In some ways it’s a little bit like the early days of the car industry, as everybody is trying to get ahead of each other. The same thing happened in the equities market – the platform market became saturated – but eventually it condensed.

“The multiplication of electronic trading venues and protocols within the fixed income platform market will continue for some time.”

Dinnage at GreySpark echoed this view, explaining decentralisation of the fixed income market would ultimately lead to more platforms coming on to the market.

He said: “Decentralisation means electronic platforms will have to be present, and thus there will be a continuation of platform saturation further down the line. If the market succeeds in decentralising, then there will eventually be a fight for market share. The fixed income market as a whole -- across every region globally -- is really only at the beginning of this process."

Algomi’s CEO, Stu Taylor told The Trade that banks’ withdrawal from the fixed income space has had a big impact on the market.