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.”
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.
He said: “The applicability of electronic trading in fixed income is limited to the most liquid parts of the market, and that’s where they have seen success. There is a ultimately a structural issue, with the nature of regulatory charges meaning banks are penalised for holding risky assets.”
He continued: “This is effectively a daily charge and can destroy trade economics if a bond may have to be held for 3-6 months, because it only trades a few times a year. Banks have now largely stopped holding inventory in these less liquid instruments and instead focusing risk and balance sheet in only the most liquid bonds.”
Co-founder at AxeTrading, Dinos Daborn, explained that despite the growth in electronic trading, he expects the more established platforms to survive the market.
Daborn said: “The market is predominantly in the hands of the incumbents, but there are other platforms gaining traction.
“We are platform and market data agnostic and will integrate to all venues, as per our client needs, so that they can access everything via the AxeTrader front end. Ultimately, the more platforms the more fragmented the market becomes – that’s where we can help.”
Deciding which fixed income platform to use can be difficult, but industry participants unanimously agree that there is no single fixed income platform out there to suit all firms.
Pictet’s Carl James said: “Some of the platforms are exclusively buy-side, or all to all. So whether you are buy or sell-side, you have to decide which platform(s) suit your trading style and strategy and fixed income instrument.“
MarketAxess’ electronic fixed income trading platform is one of the market’s success stories. Its platform is considered a market leader by many, and enables fixed income traders to source competitive and executable bids from over 1,000 global institutional investors and broker-dealers.
The Trade asked Gareth Coltman, head of European product management at MarketAxess, what he thought separates MarketAxess from other fixed income platform providers in the market.
He said “Technological innovation is at the core of our business and we are providing new ways for firms to access the market through data….
“Trax, a subsidiary of MarketAxess, is a leading provider of capital market data, trade matching and regulatory reporting services and estimates that it processes approximately 65% of all fixed income transactions in Europe as part of its post-trade service offering.”
Coltman added: “This level of insight into the European fixed income markets has ultimately helped improve the trading experience on the MarketAxess platform and has allowed firms to engage with the market in new ways.”
When looking at other players in the market, Watters at AxeTrading suggested those platforms with the least administration requirements may trump the market.
He said: “There is no perfect fixed income platform out there, but those with a central counterparty and less administration for onboarding appear to be winning market share.
“Those going towards a central counterparty model are beginning to evolve and are the showing the way forward.”
Bondcube, an electronic trading start up which launched in 2012, is an example of a less successful venture in to the fixed income platform market. The firm filed for liquidation in Summer 2015.
Despite being backed by Deutsche Boerse, Europe’s largest exchanges operator, shareholders decided not to provide further funding to Bondcube when “sufficient business prospects failed to materialise.”
Bondcube suffered a ‘liquidity drought’ and lack of trading activity which ultimately halted its growth. At the time, market observers forecast Bondcube was one of the first of many fixed income platforms set to fail.
GreySpark’s Russell Dinnage highlighted the difficulties facing new fixed income platforms: “There is a high barrier to entry for any new exchange platform operator in any asset class, but especially in fixed income where - up until the last 5-10 years - the concept of partial or fully electronic execution was not standard across the marketplace.”
Algomi’s Taylor echoed Dinnage’s thoughts and added: “It’s tough because fundamentally when a new player enters the market, everybody wants to know what is new and what their edge is.”