Pandemic sees electronic fixed income trading skyrocket in 2021

Research by Greenwich Associates estimated that the average daily e-trading volume reached a new record of $10.6 billion in January earlier this year.

Remote working conditions and volatility caused by the pandemic have caused electronic trading volumes to skyrocket in 2021, according to a report by Greenwich Associates.

The statistics from Greenwich confirmed that the average daily volume for fixed income electronic trading had reached a new record of $10.6 billion in January earlier this year.

The new record significantly surpassed the previously set record of $10.3 billion that was recorded in May last year.

Greenwich Associates’ head of research for market structure and technology, Kevin McPartland, attributed the surge in electronic trading seen to long-term conditions caused by the COVID-19 pandemic.

“It’s [the growth of e-trading] been several years in the making but 2020 definitely accelerated things. There was definitely a work-from-home component and a more macroeconomic backing to it considering how busy the credit markets were. We also saw a surge in new issuance and a lot of speculation around high yield markets and whether there would be defaults,” said McPartland.

“There were a lot of natural market forces that also drove the need for people to find liquidity by trading more bonds in more efficient ways. I think a lot of the adoption is certainly about electronic execution but there’s also a big workflow compliance component to that as well.”

According to the report by Greenwich, one element of this surge that stood out was the proportion of these new volumes that are taking place on tools other than disclosed request for quote (RFQ), which the firm said now accounts for nearly half of the volumes.

In January, MarketAxess reported one-third of its volume was through its anonymous RFQ and all-to-all trading tool, OpenTrading, said Greenwich Associates. While Tradeweb had also seen increasing demand for its Dealerweb Sweep and portfolio trading offering.

“There’s a lot of adoption of outside the traditional, what we would think of as bond trading and RFQ,” said McPartland. “We have got to the point where the low hanging fruit had been picked, so people have been trying to figure out how they trade in bonds that are less liquid, how do they trade bonds that are harder to price, how do they trade large block orders etc. that hadn’t been done electronically before.”

Portfolio trading, which allows traders to bundle multiple bonds into a single basket to be executed in one transaction has become increasingly popular with participants in the last year as a tool for risk management during market volatility.

According to research from Greenwich Associates in June, just under half of fixed income investors in Europe said they had either executed or planned to execute a portfolio trade within the next year.

Earlier this year, ICE Bonds also confirmed it had recorded significant increases in its volumes for fixed income portfolio trading in Q4 of 2020 with its notional activity rising to $1.9 billion.

The volumes recorded in Q4 had doubled compared with the previous quarter and marked the strongest period of activity the exchange had seen since first launching portfolio trading.

The uptake in portfolio trading in recent years has driven the uptake in electronic trading in the fixed income markets as the process still heavily involves what is effectively a shared google spreadsheet, said McPartland.

Greenwich Associates confirmed in research from June that portfolio trading remained a heavily manual process.

Several portfolio trading initiatives have been launched by participants in recent months as the market looks to cope with the increasing demand in the fixed income market.

In December, US investment bank Citi made two senior appointments across its bond trading business under plans to expand its portfolio trading franchise.