Electronic trading in fixed income is still in a “nascent stage” in Brazil, with nearly 80% of trading in government bonds still voice-based, according to a Celent report.
The report found the level of e-trading in Brazil’s fixed income market is quite low, compared to the US and Europe, and it may take some time to take off.
Celent believes reviving the secondary bond markets would be an important milestone for e-trading, and foreign banks could have an important role to play in this area.
Secondary bonds are one-sided because holders keep their positions to maturity, limiting liquidity and trading, the report said. The biggest challenge ahead would be achieving a level of liquidity and competition that make electronic trading more efficient and economical.
Brazilian fixed income is a highly concentrated market, with the top six players accounting for about 55% of the total trading. Domestic banks are dominant with a large retail customer base, but foreign banks HSBC, Goldman Sachs, Barclays and Deutsche Bank have a “meaningful presence”.
The average ticket size of electronic trades in investment-grade bonds is around US$600,000, which is much smaller compared to voice-based trades at US$4.8 million.
Celent estimates that, as a percentage of the total secondary market trading activity, electronic trading accounted for around 5.7% of the total share in government bonds, and around 2.4% of the total share in corporate bonds in 2012.
The annual turnover on electronic platforms is expected to grow though, from BRL 137 billion (£38 billion) to around BRL 250 billion in 2015 in government bonds, and from BRL 3.3 billion in 2012 to around BRL 4 billion in 2015 in corporate bonds.
Electronic trading in fixed income has been around for years, but Celent believes Basel III, automated risk management, standardisation of the FIX protocol, and smaller sized trades have created a “greater sense of purpose and urgency.”
And with sell-side institutions scaling back their fixed income operations, the opportunity has opened for electronic trading platforms to help buy-side players find liquidity, the report said.