Only 44% of US buy-side firms agree that proposed rules for electronic treasury trading venues to increase transparency will be beneficial for the market, research by Greenwich Associates has found.

The report, which surveyed 67 US treasury investors across investment management firms, hedge funds, banks, insurance firms, and government agencies, also found that 86% believe the US treasury market is already generally transparent.

The new rules were proposed by the US Securities and Exchange Commission (SEC) in September, and would bring electronic treasury trading venues in scope of fair access rules and Reg SCI requirements.

Under the new rules electronic trading venues that meet certain criteria would be required to register as an alternative trading systems (ATS) or a national securities exchange.

Fair access rules would also require platforms to have clear standards for granting access to trading systems without limitations on any person from trading in a security and Reg SCI requires that technology and systems are secure and stable. 

Kevin McPartland, head of research for market structure and technology at Greenwich Associates and author of the report said this could disrupt the progress of markets who have implemented blocking. 

“In the days of voice trading, no one would suggest you have to trade with anyone who wants to trade with you. There is a reason why the sell-side works so hard to be included on their clients’ counterparty lists,” said McPartland. “With these levers applied to a trading venue, however, the proposed rules could, in fact, require you to trade with anyone that wants to trade with you.”

ATS registration includes the disclosure of broker-dealer operators, order types, and other parts of the operating model, and the SEC has the power to declare these filings ineffective, meaning it could prohibit a firm from operating.

Fair access and reg SCI rules are only applied to a platform when the ATS trades 5% or more of the average weekly dollar volume in four of the prior six months, or $25.95 billion per day according to data by the Financial Industry Regulatory Authority (FINRA). 

“While the requirements themselves are not necessarily that onerous, it is worth noting that even existing platforms could be moved to the side-line until their filing and its contents are approved,” added McPartland.  

Greenwich said that CME BrokerTec would have to comply with the rules as it saw an average daily volume in the second half of 2020 of $99 billion.

Elsewhere, if Tradeweb combines the recently acquired Nasdaq Fixed Income business with its Dealerweb platform, it would also fall in scope of the rules with average daily volumes in the same period of $26 billion. 

The proposed rules do not cover bilateral volumes or dealer-to-client platforms that operate via request for quote, ignoring half of the electronic trading volumes in the US.  

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Big data is the most underappreciated emerging technology in markets, equity and fixed income investors surveyed in new research from Greenwich Associates have agreed.

The report surveyed 234 equity and fixed-income investors at buy-side firms across Europe and the US, finding that 30% of them thought big data was underappreciated.

“Data and analytics have clear potential, and while not every trader can make use of big data for trade ideas or trade executions, it’s clear that traders see that opportunity exists,” said the Greenwich Associates report. 

“Fixed-income traders as a group are even more bullish on big data and alt data than equities. The amount of data available to fixed income traders has ballooned in the past decade, and we are in a phase in which market participants are working hard to put that data to work.”

Big data was followed by artificial intelligence (AI) which 27% of investors agreed was also underappreciated, while 25% stated blockchain technology was underappreciated.

Both the buy- and sell-side are expected to increase their spending on AI, blockchain, and cloud technologies by a third in the next two years, recent research from Broadridge found. The firm also found that 72% of firms in the UK were actively recruiting externally to help meet their technology needs.

Banks and brokers have upped efforts in the big data space recently amid increased demand from the buy-side. Virtu Financial recently rolled out two big data analytics tools to allow buy-side clients to manage data across trading strategy selection, cost attribution, and counterparty evaluation through a unified web-based technology framework.  

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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.

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The poll of 84 buy-side equity traders found that 30% of viewed outsourced trading as a way to help with processes like managing trading flow and achieving best execution.

The study found that competitive pressures and increasingly complex markets meant that investors were keen to offload “non-core” activities to outsourced trading desks while focusing internal resources on core issues.

“As more buy-side firms realise that they don’t have the resources to cover every aspect of execution, clearing, settlement, and regulation more of these firms will consider whether it makes sense to outsource their trading desks and reallocate resources to their areas of expertise,” said Shane Swanson, author of the study and senior analyst for Greenwich Associates market structure & technology.

Just one in 10 institutional investors surveyed said they were currently outsourcing, while 10% of study respondents had still not heard of outsourced trading.

The study highlighted opportunities for outsourced trading desks in fixed income, with the electronification of the corporate bond market and the regulatory focus of the US treasury trading market over the last ten years. The developments have created further complexities for bond traders that could encourage outsourced trading in this area.

“For firms without the resources to either take advantage of the opportunities or to navigate the complexities, outsourced trading for fixed income could also prove an attractive solution,” added Swanson.

Several asset managers have confirmed plans to engage with outsourced trading over the past year. Just last month, US-based Westwood Holdings Group selected Northern Trust to provide outsourced trading through its integrated trading solutions service.

The $12 billion asset manager said Northern Trust would be responsible for its equity and fixed income trading, as well as its middle-office trade settlement support under the agreement.

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A recent poll of 210 financial services compliance professionals globally by Greenwich Associates found that just 4% expect their firms to require traders to return to in-house trading desks every day after the pandemic.

Many had seen a highly successful adjustment period to remote working conditions this year, with two-thirds of financial services stating that employees will be permitted to work from home on a permanent basis.  

“The good news is that compliance professionals and technology platforms were up to the task by ensuring the market’s smooth functioning during the market’s biggest test,” said Danielle Tierney, senior advisor at Greenwich Associates Market Structure and Technology and author of the report.  

“Even for the few firms determined to fully return to a pre-pandemic office presence, maintaining a work-from-home capability will be essential since US and European regulators have clearly communicated the necessity of a flexible infrastructure conducive to working remotely.”

The report added that firms tackled remote working challenges by shifting focus to core compliance infrastructure and by partnering with external regulation technology providers, with a focus on communications monitoring and trading surveillance.

This year to date, around three-quarters of participants in Greenwich Associates report strongly agreed that their organisation considered compliance standards highly important, which marked an increase of 11% compared to 2019.  

Since firms have been forced to work remotely due to pandemic this year, many major institutions have confirmed plans to support permanent working from home for staff. In August, global asset manager Schroders embraced flexible working conditions, including working from home.

Schroders said the decision to implement permanent flexible working conditions was influenced by the smooth running of its business throughout lockdown which it attributed to its ability to function remotely. 

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The research revealed that the number of traders on buy-side trading desks has remained essentially unchanged from 2018 to 2019 with eight on average in fixed income, slightly over seven in equities, and six in foreign exchange.

Head of research for the Greenwich Associates market structure and technology group, and author of the report, Kevin McPartland, stated that $1.25 million was spent on fixed income technology by typical asset managers last year alone.

However, he added that the electronification of fixed income in recent years has increased the capacity of traders on the buy-side trading desk, rather than removed them from their role. Evidence from the research found no negative impact on the number of human traders despite technological advancements.

Elsewhere, the research suggested buy-side traders are seeing responsibilities expand into new areas and asset classes. It found that 47% of fixed income traders are now also trading derivatives, 26% are trading foreign exchange and 20% are trading exchange traded funds (ETFs).  

For equity traders, Greenwich added, 60% of cash equity traders are also trading ETFs, 45% are trading derivatives, 35% trading in foreign exchange, and 21% trading fixed income instruments.

However, buy-side trading desk budgets remain tight and the average buy-side fixed income trading desk spends around 60% of the budget on trader compensation, with this increasing to almost 80% for smaller hedge funds.

“Today, firms can use tightly integrated enterprise trading technology that allows buy-side trading desks to trade more, achieve better executions, and do it at a lower cost,” added McPartland.

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Trade surveillance technology spending has increased significantly due to compliance weaknesses identified during the COVID-19 pandemic, according to Greenwich Associates.

In the last 10 years, the trade surveillance technology market has grown between 13% and 14% year on year.

At the beginning of this year, Greenwich Associates predicted that the trade surveillance technology market spend would reach $1.2 billion in 2020.

However, market volatility and uncertainty brought by the COVID-19 pandemic have meant firms have had to adapt.

This volatility and the subsequent need for infrastructure upgrades have led Greenwich Associates to predict that the trade surveillance technology market will now grow 23% in 2021 taking the predicted spend to $1.5 billion.

“Financial service firms have suddenly encountered a perfect storm of compliance challenges,” said Greenwich Associates market structure and technology senior advisor Danielle Tierney.

“Some firms were simply unable to maintain compliance and surveillance monitoring while continuing operations during at onset of the crisis.”

Compliance difficulties relating to the pandemic identified by Greenwich Associates include: difficulties obtaining monitored and secure system access, alert backlogs at firms with insufficient surveillance resources to manage market volumes and volatility, and problems adjusting monitoring capabilities and holistic surveillance integration.

“The demand for surveillance technology has attracted an influx of new entrants attempting to win a share in this growing market,” said Greenwich Associates in a statement.

In February earlier this year, the US-based trade surveillance and market risk software provider, Eventus Systems, raised more than $10 million in a Series A funding round, as it looked to expand its business.

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Greenwich Associates highlighted how coming into 2020, three new stock exchanges had announced their planned entrances and a host of regulatory actions loomed on the horizon.

These included new order-routing disclosures, a delayed Transaction Fee Pilot, potential changes to unlisted trading privileges, and a proposed overhaul of the securities information processors (SIPs) for market data.

The pandemic has halted some of these transformative developments, the research outfit explained.

The report also revealed a major shift in US equity trading volumes away from the exchanges. In 2019, the Trade Reporting Facility (TRF) reported a stable level of off-exchange trading between 35 and 40%. Only 16 days reported having TRF volume above 40%.

However, the Greenwich Associates report confirmed that as of June 2020 reported TRF exceeding 40% had already been recorded 58 times.

“Standard market analysis would say that in such volatile times there would be a flight to the stability of the lit exchanges, and initially, this did indeed occur,” said author of the report and senior analyst at Greenwich Associates market structure and technology, Shane Swanson. “However, as the US equities marketplace proved its overall resilience, off-exchange volume not only rebounded but expanded.”

The report confirmed that the role of market makers and retail trading was having a significant impact on this increase of off-exchange trading.

“With proper systems, risk hedging and management, some market makers appear to have been able to internalise more trades with the retail market, resulting in the increase in market share moving away from the exchanges,” said the Greenwich Associates report.

The pandemic has also halted plans for several exchanges to launch. The new exchange entrant Members Exchange (MEMX) was set to go live this month after receiving regulatory approval from the US Securities and Exchange Commission (SEC) in May and financial backing from Citi, BlackRock, Wells Fargo, Flow Traders, Bank of America, Morgan Stanley, Virtu Financial, Citadel Securities, Fidelity Investments, and others.

However, MEMX will now launch in September this year. Other exchanges to experience delays include MIAX PEARL Equities and the Long-Term Stock Exchange (LTSE).

“With massive proposed changes to market data infrastructure on the SIPs, new exchange entrants eager to prove their value, and, of course, the coronavirus itself, the most certain bet is that 2020 will be one for the books,” added Swanson.

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According to research from Greenwich Associates, around 40% of fixed income investors in Europe said they have either executed or plan to execute a portfolio trade within the next 12 months.

Portfolio trading allows traders to package multiple bonds into a single basket for execution in one transaction.

“Anecdotally, some clients have found portfolio trading a useful way to adjust their portfolios during the COVID-19 crisis, as they can mix bonds that are easier to trade with ones that are more difficult to execute,” said Tom Jacques, author of the report and principal at Greenwich Associates.

More commonly known as basket trading, portfolio trading has been part of the landscape for a while, but with the electronification of global bond markets and a surge in fixed income ETFs, it has become an efficient way for traders to deal with large, complex and multi-faceted transactions, particularly in credit.

Speaking to The TRADE in March, fixed income platform Tradeweb said it had seen a steady increase in the number of clients adopting portfolio trading globally to increase certainty of execution on the whole basket. The number of daily line items executed via portfolio trading at Tradeweb surge more than 100% in March compared to the first two months of the year.

However, the research from Greenwich suggested that despite advances in technology, portfolio trading remains a largely manual process. A large portfolio trade could also increase risks around mandatory buy-ins under the Central Securities Depository Regulation (CSDR) should a single trade fail.

More than half of European buy-side traders respondents told Greenwich that the CSDR rules would harm liquidity in fixed income markets. Multiple buy-side trade associations and industry groups have warned regulators of the potentially detrimental impact of the rules, particularly the mandatory buy-in regime for failed trades.

The TRADE’s sister publication Global Custodian wrote recently that trade fails spiked significantly at the height of the coronavirus pandemic, according to data from the International Capital Markets Association (ICMA). Some banks reported that average daily settlement fails in the European repo market increased four or five times their normal rate in April. 

The EU markets regulator said recently it would delay the settlement discipline regime (SDR) set out under CSDR until February 2021. However, the watchdog denied a formal request to defer the mandatory buy-in regime and phase in new rules for failed trades, stating the new February go-live date will give market participants enough time to prepare.

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Buy-side traders in the US have named the brokers they were most satisfied with as the global coronavirus pandemic gripped equity markets in March.

A survey of US buy-side traders conducted by Greenwich Associates several weeks later in April found that despite the widespread shift to remote working, a significant 80% of respondents were satisfied with brokers’ performance.

Of those buy-side traders, 50% said they were ‘highly satisfied’ with brokers’ performance, despite issue being raised about settlement processes, according to Greenwich. The traders were asked to consider equity brokers’ performance in providing liquidity, hedging solutions and market insights at the height of the volatility.

Jefferies, Morgan Stanley, Goldman Sachs, JP Morgan, Citi and Bank of America Securities were listed as the ‘standout dealers’, considered most helpful in navigating the market turmoil caused by coronavirus. Outside of the larger institutions, Greenwich said that Instinet, JonesTrading, RBC Capital Markets and Virtu Financial, also stood out for execution support among clients.

More than 50 brokers were named as being particularly helpful during the period, which John Feng, author of the research and managing director for markets at Greenwich Associates, said highlights the need for the sell-side to continue investing in technology amid increased competition.  

“The sheer number reflects the fiercely competitive nature of the equities business and is a reminder that gains can be transient and firms that have performed well in the short term will need to continually invest and adapt to maintain their edge,” said Feng. “One outcome is not in doubt: The crisis has underscored the need for all firms large and small to continue to invest in technology, both in execution and in workflow.”

Earlier this month, Greenwich revealed via a separate study that buy-side traders in Europe ranked JP Morgan as the ‘standout dealer’ for fixed income in the region during the coronavirus pandemic market volatility. JP Morgan topped the overall league for European fixed income across G10 rates and G10 credit, while Goldman Sachs and Citi ranked second and third respectively.

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