Volatility and wider spreads wrought by the financial crisis have pushed more European fixed income trading towards voice-based channels, but an electronic trading resurgence among the buy- and sell-side is underway, according to a new report from research and consulting form Celent.
According to the report, ‘Electronic Trading of Bonds in Europe: Weathering the Storm’, bid-ask spreads for European government bonds peaked at 400 basis points in the second half of 2008, compared with 80 bps in the second half of 2006. Spreads subsequently dipped to 360 bps in the first half of 2009 and are expected to be 210 bps for the second half of the year.
The electronic trading share of overall buy-side fixed income volume dipped to 32% in 2008 from 35% in 2007. However, Celent said the proportion of buy-side electronic trading had risen to 26% in 2009, and the firm expects it to surge to 48% in 2012.
Similarly, the electronic trading share of sell-side volumes fell to 33% in 2008 from 34.5% in 2007, but increased to 38% in 2009 and is expected to grow to 46% in 2012.
“The share of electronic trading will rise as the economy improves and spreads tighten,” the report said. “The high levels of volatility have led to a greater reliance on voice trading. However, we expect a return to pre-crisis levels and even further growth in the levels of electronic trading by 2011. The greater competition in the electronic markets in Europe will aid this process.”
Celent also expects a resurgence in European fixed income trading volumes. The firm said government bond volumes are down 20-30% on their pre-downturn levels, and non-government bonds have fallen 70-80%. However, it added both volumes had recovered and should return to their pre-downturn levels in 2010.
However, the report also noted that the current post-trade infrastructure in Europe was holding back growth of fixed-income liquidity.
“It is noncompetitive and fragmented, and CCP [central counterparty] services are only available for transactions conducted electronically,” said Axel Pierron, senior vice president at Celent and co-author of the report. “With more competition, we could see development similar to what we saw in the equity market, where implementation of the Code of Conduct in conjunction with MiFID has driven a significant decrease in post-trading costs, indicating the emergence of truly pan-European clearing houses such as EuroCCP and EMCF. This evolution would be beneficial to European fixed income market participants and, eventually, to issuers.”