Acquisitions of fixed income connectivity solutions spotlight the 60% growth potential of this market

Senior analyst at Aite Group, Vinod Jain, discusses the attractiveness of fixed income connectivity platforms and the key reasons firms are making acquisitions in this space. 

Bloomberg’s acquisition of Broadway Technologies follows on the heels of AxeTrading being acquired by Trading Technologies and the 2021 acquisition of LIST Group by ION. With so much activity in this space in recent years, you may be wondering, “Why all the interest in fixed income connectivity solutions?”  

The surge in fixed income electronic trading has significantly increased the importance not only of the ability to route trades to the appropriate market venue for execution but also of bringing efficiency to pre-trade and post-trade functions. This shift puts fixed income connectivity platforms at the centre of sell-side market demand for a robust, customised, fixed income workflow.  

There are four key reasons why firms making acquisitions are finding fixed income connectivity platforms attractive.  

1.    Dealers don’t replace incumbents, making this a sticky market. As the sell-side firms are migrating toward vendor solutions, the replacement market is limited. But that’s not to say there’s no opportunity. Vendors are growing organically via supporting new market venues, asset classes, and trading protocols to become clients’ primary way of accessing the market. Sell-side firms are avoiding the risk of undertaking large transformation projects to replace existing connectivity layers, but they are building additional subsystems or adding new vendor solutions. 

2.    As dealers demand more coverage and functionality, these platforms offer vertical and horizontal functional growth potential as well as corresponding revenue opportunities: Dealers are demanding the ability to manage trading connectivity with more venues, asset classes, and trading protocols while acting as principals and acting on an agency basis to meet clients’ order flow. There is an increasing demand from sell-side firms to support additional functions such as risk management, trade matching, post-trade processing, and position-keeping functions. Vendors are responding by providing support for algo trading and using AI and machine learning technology to support data analytics functions, by providing a range of product variations for fixed income trading, and by offering multiple custom tools to configure trading workflows.  

3.    Fixed income connectivity solutions are viewed as supporting growth. Sell-side firms maintain connectivity with more trading venues than they actually use so they can execute the orders at a particular venue when a client demands it. New venues are proliferating, and new trading protocols such as portfolio trading and all-to-all trading allow firms to effectively transfer the risk in the available liquidity pool with greater sophistication and improved execution workflow, such as trading a large illiquid basket of bonds in a volatile market. These changes make fixed income connectivity platforms even stickier and highlight the additional growth opportunities for providers. 

4.    There is high market growth potential; Aite-Novarica Group expects to see spending on fixed income connectivity solutions increasing more than 60% between 2022 and 2025. Sell-side firms are investing more than ever in fixed income connectivity solutions to improve monitoring of customers’ trading behavior and to discover how events such as market news impact order flow. Firms are looking to internalise order flows more efficiently across trading desks, to provide greater economies of scale for trading securities in which volume is particularly high, and to identify the best price and liquidity for the securities. The increases in fixed income electronic trading, demand for custom workflows, and support for new trading protocols are driving technology spending. The final estimates suggest US$295 million was spent on fixed income connectivity in 2022. Global spending is expected to increase by 60% to reach US$497 million by 2025.  

Firms are avoiding the risk of undertaking large transformation projects to replace existing connectivity layers, but they are building additional subsystems or migrating to new vendor solutions.