E-trading growth in Asia so far has been a result of relatively liquid G3 and Chinese Yuan denominated bonds; however, more recently, trading in local market bonds has moved increasingly onto electronic trading venues.
Coalition Greenwich’s “Electronification and Market Access Drive Alpha in Asian Bond Markets” presents the results of a recent study which interviewed 700 Asian bond investors trading more than $2 trillion of domestic and hard currency bonds in 2020.
The study examined the current state of fixed income electronic trading in Asia, possible roadblocks affecting progress and room for growth in the future.
In 2016, Coalition Greenwich found that 14% of Asian bonds traded by the buy-side, including domestic and hard currency bonds, were executed electronically. By the end of 2020, the percentage had increased significantly, with over one-third trading electronically via major trading platforms, which included 37% of domestic-currency bonds.
“The uptick in e-trading for local currency bonds demonstrates that e-trading growth in Asia is not simply from international firms trading G3 bonds, but is increasingly local,” said Kevin McPartland, head of research in the Coalition Greenwich Market Structure and Technology group.
The global growth of fixed-income e-trading is not only from increased participation, but also from protocol innovation, according to Coalition Greenwich.
It claimed that all-to-all trading protocols, such as anonymous RFQ and some auction-style offerings, have allowed the buy-side to provide liquidity and, conversely, dealers to send RFQs, neither of which would have been possible a decade ago.
Asian investors are expecting to make more use of streaming prices in the future, mainly via multi-dealer platforms, but also from dealers via API and all-to-all trading.
In terms of roadblocks affecting progress, the Coalition Greenwich study found that market norms grounded in local culture and traditional relationships, as well as diverse, varied regulatory regimes, leave global bond investors longing for the more structured, electronic markets found in Europe and the US.
Changing cultural norms and perspectives has often proved to be more challenging than changing the technology itself.
In Asia, relationships are still vital when trading bonds and fears that e-trading will disrupt such relationships has left many Asian investors anxious.
In addition, amongst both the buy- and sell-side, many remain unconvinced about the cost-benefit analysis of e-trading.
“Despite clear electronification progress in Asia over the past several years, there remains much more opportunity for growth and increased efficiency beyond the growth of all-to-all and portfolio trading,” says Vignesh Srinivasan, research associate at Coalition Greenwich.
“Many dealers still have people quoting prices on liquid bonds in G10 currencies, a process that really should no longer need human intervention.”