Euro investment grade market structure changes are evolving buy-side trading styles

In Flow Traders’ latest whitepaper, the market maker states that a shift to electronic executions has helped increase Euro IG volumes, while exploring additional advancements in the wider fixed income markets.

Market structure changes in the Euro investment grade (IG) markets and new drivers of liquidity are evolving buy-side trading styles, a whitepaper by Flow Traders has found.

Euro IG has continued to transition primarily to electronic executions, which has helped increase volumes. Euro IG ticket sizes up to one million have seen the most noticeable growth in both tickets and volume, which Flow Traders has attributed to electronification.

The percentage of trades within this ticket size increased to 29% last year, up from 23% in 2018. One to 2.5 million and 2.5 to five million ticket sizes remained relatively consistent when compared to 2021, while the five to 10 million and 10 to 50 million ticket sizes continued to decrease. The sub one million ticket size buckets contribute towards around 90% of tickets today.

As broker dealers focus more on complex trades and less on the execution of low-touch trades, Flow Traders found that a growing number of buy-side participants are adopting a combination of low-touch and high-touch execution models – including using enhanced pre-trade analytics to determine dealer selection for high-touch trading and protocols such as MarketAxess’ Open Trading for low-touch trading.

Although algorithmic trading has mainly been seen as a beneficial, a 2022 survey from Flow Traders found that 40% of surveyed buy-side firms felt that algo trading had deteriorated price discovery within fixed income markets.

This contrasted responses with respect to the execution of odd lots, larger blocks and dealer relationships – where 54%, 49% and 43% of surveyed firms, respectively, stated that these areas had been enhanced by algo trading.

Elsewhere, Flow Traders highlights that with more executable prices and improved automation, the implementation of quantitative strategies becomes easier to execute and improves the availability of reliable data – which contributes the new drivers of liquidity.

The ETF ecosystem and the increase in algo trading was also noted as a contributor for improving transparency and improved liquidity, in particular in the bond markets. Fixed income ETFs and their proximity to underlying credit markets, has seen the same execution practices being copied, resulting in increased algo trading for bonds in scope of the leading ETF indices.

Flow Traders stated that the most liquid ETFs are more cost effective to trade when compared to bonds, and attributed increased interaction between the two markets as having a positive impact on liquidity. 

Flow Trader’s report also touched on the impact of a consolidated tape (CT) in the fixed income markets. The firm likens the proposal to the introduction of TRACE in the US, while urging policy makers to study its implementation and the positive impact it has had on transaction cost and liquidity.

In its report, Flow Traders stated that arguments suggesting that transaction costs would increase as a result of a CT are inaccurate, instead highlighting that improved transparency would be beneficial for fixed income markets.

“Electronification including automation and availability of data contribute as new drivers of liquidity. Other new drivers of liquidity include the impact of the ETF ecosystem and the increase of transparency, mainly post-trade. Further developments in the Euro IG credit market structure and the changes in trading styles, specifically the rise of low-touch and high-touch trading styles will impact the market structure and the ways in which trading occurs,” said Ramon Baljé, head of fixed income EMEA at Flow Traders.

“Flow Traders is very excited to see how these new trends will impact our trading strategies. We believe that a CT in Europe will impact the market positively by not only increasing transparency but also by leading to more innovation, new players and ultimately lower costs for investors.”