The fixed income market has been rapidly evolving over the last decade. In what was once an overwhelmingly manual market, the adoption of new technologies has helped to improve workflows and increase efficiencies. And like many sectors over the past two years, the pandemic has further accelerated this change, driving unprecedented adoption of electronification and automation in fixed income trading.
The market volatility due to Covid-19 has also led to a boom in fixed income exchange traded funds (ETFs), with some of the biggest traders in the world now moving into bond trading – or at least building the infrastructure to do so. With the once niche bonds market growing in popularity combined with the increased adoption of electronic trading and automation, fixed income trading is on the cusp of radical change – change that will bring new rules and regulations, as the Securities and Exchanges Commission (SEC) puts the fixed income market under the spotlight.
Automation vs. human interaction
The complexity and intricate nature of bond trading has traditionally made it more difficult to automate than equities. As such, fixed income trading has always required more human-to-human interaction than other asset classes. And while these manual processes will always play a part in the fixed income market, electronification is now becoming more prevalent, with automation, algorithms and systematic trading rising in popularity.
Trumid estimates that electronic trading of corporate bonds has grown from around 15%-20% in 2015 to close to 30% in 2022, with the potential to continue to grow as high as 60%-70% over the next five to ten years. JP Morgan’s asset management clients predict that 40% of all their corporate bond trades will be electronic by this year, and almost half of all government bonds trades are already electronic.
However, human-to-human interaction remains a crucial part of fixed income trading – a facet that cannot be fully automated. That means the technologies chosen for this particular asset class need to augment, not replace, human traders. It’s important to allow for flexibility in the methods chosen that allows everyone to trade in their own unique way. Rather than forcing people to use a specific workflow and dictating specific methods, allowing traders to pick and choose what works for them will be the key to success as the fixed income market becomes more and more automated.
Bigger market, more regulation
Already, the US bond market is worth over $50 trillion. SEC Chair, Gary Gensler, noted in his recent speech at City Week that fixed income markets are integral to how central banks around the globe administer monetary policy. He also noted that due to fixed income markets increasingly having moved to electronic trading, combined with a greater share of bond ownership having shifted to registered investment companies, it raises challenges for financial resiliency. As such, the SEC is proposing new regulations around fixed income trading, specifically looking at ways to improve pre- and post-trade transparency, to modernise rules around electronic platforms, and ultimately, enhance financial resiliency.
These changes will mean that fixed income traders will need to work within similar guidelines as seen in the equities markets – a stance that is generating significant debate both in public and private. They’ll likely need to make sure that trading is happening within an alternative trading system (ATS) or a regulated trading platform, and they’ll need to invest in solutions which allow them to meet pre- and post-trade transparency regulations in real time – or as close to real time as possible. For firms that aren’t already exploring how they’re going to adhere to the upcoming regulations, there’s no time to delay. The proposals are already written and currently being finalised, and the current administration has been advocating change at a faster pace than we’ve seen in recent years.
The pandemic accelerated the electronification of fixed income trading, but that doesn’t mean the trend will slow as the pandemic subsides. Despite the initial challenges faced by remote workers, it opened new, more flexible ways of working that fixed income traders won’t want to give up – and was recently tested by London’s transit strike that saw many colleagues simply working from home. This demand for more flexible, remote working options is yet another factor that will see the bond market becoming increasingly electronic and will ultimately lead to new technologies being developed that will further maximise efficiencies and optimise the performance of fixed income trading workflows.
Technology is already transforming the bond market, but there will always be room for improvement. With most workflows still being done manually, there’s a lot of ground left in terms of what can be digitised. Although the electronification of fixed income markets will never replace human expertise, many of our partners see their client acquisition and revenue growth coming from the ease of these channels. As we move through 2022 and beyond, we will see significant changes coming to the fixed-income trading market as the next stage of fixed income electronification takes hold.