The study found that traders were forced to revert back to voice trading during the period as the market became too volatile and illiquid for dealers and liquidity providers to risk offering prices across electronic platforms. Some banks even shut down their algo trading completely at the time, while others opted to continue auto-quoting prices. 

Prices found on platforms were also unlikely to be executable, buy-side respondents told ICMA, and in some cases electronic request for quotes (RFQs) did not return quotes. As the volatility tightened its grip on markets during the crisis, bid offer spreads widened dramatically and banks providing principal liquidity began to retreat.

While the pandemic and lockdown sparked the market volatility which would cause electronic trading in bond markets to stumble, one head of trading for an asset manager based in Europe, who spoke to The TRADE on condition of anonymity, explained that the liquidity challenges are in fact inherent in fixed income trading.

“That is the nature of the market,” the buy-side head of trading says. “Fixed income markets in Europe are dominated by market makers and large banks, and essentially the liquidity is in their hands. The market participants pricing the business have to price it from their books, it’s kind of like trading with a risk desk.

“When we trade electronically we have many indicators but as markets get turbulent, bid offers widen significantly on the screens. It’s our role to then pick up the phone, not to give up on the electronic platform, but to check the pricing and see if we can get improvements on that price. That’s the nature of the trading business – all of us need to think more about picking up the phone and improving prices.”

ICMA’s study found that while many banks were able to continue providing liquidity and making markets, overall dealer capacity shrunk at the height of the volatility when it was most needed. Stricter capital rules and smaller balance sheets would have impacted dealer capacity, although ICMA also noted that internal bank policies aimed at reducing market making activities, and less experienced desks experiencing the surge in volatility could have played a part in the trend.

Speaking to The TRADE about the ICMA study, Mark Goodman, head of platforms at UBS and president of UBS MTF, says that it was reliance on a single method of generating liquidity in the market, mainly principal, that broke down at the height of the volatility.

“It was very difficult to operate in that environment, and the balance sheet restraints and risk limitations on banks means that if you were fully reliant on that source of liquidity, then it’s true you were probably not seeing firm prices on the electronic platforms,” Goodman says. “Instead, you needed to pick up the phone and speak with multiple dealers to get your trade done. It’s not that the technology didn’t work, we would argue that it’s actually you need more diversity in the market, rather than a simple client-to-dealer model.”

Goodman added that UBS saw 250 more firms dealing on the Bond Port trading platform since February, and buy-side participation soared 152% as traders sought to navigate the challenging liquidity landscape. In March and April, Bond Port was also top three in terms of volume executed in US dollar corporates.

“What we saw was clients looking for new ways to get their trades done, and that was clear in the numbers we saw on Bond Port. It wasn’t the case the buy-side was not able to find liquidity because algorithms and technology stopped working, the buy-side is not able to find liquidity period. That’s why traders are looking more to channels like Bond Port to get their trades done.

“Similar platforms and our own show what is important during these stress periods. It is not whether brokers have invested in algos, or whether algos work or not, it’s that brokers are, from a historical standpoint, relatively restricted on the balance sheet.”

ICMA’s report found that e-trading volumes reduced dramatically during the period compared to voice, but many bond trading venues reported record volumes at certain points during the crisis. At Liquidnet, average trading volume on its fixed income platform jumped by around 130% in March to April compared to January to February. During the same period, buy-side daily liquidity increased roughly 60%, and the number of daily buy-side blocks grew 25% to more than 650. 

“During the higher market volatility conditions of March and April, we saw a spike in volume, liquidity, and number of blocks at Liquidnet,” says Constantinos Antoniades, global head of fixed income at Liquidnet. “As market conditions deteriorated and bid/offer spreads widened, finding natural liquidity from buy-side counterparties, anonymously, and inside the bid/offer spread became advantageous and resulted in large transaction cost savings and in many cases access to block liquidity not accessible elsewhere. Our customers were able to leverage our deep liquidity and network for their liquidity needs, at a time where they need such liquidity the most.” 

Senior buy-siders agree that venues such as Liquidnet and MarketAxess proved significant in plugging the liquidity gap left by the banks. However, the buy-side European trading head adds that while the gap was noticeable, some investment banks held strong throughout the crisis and had strong interaction with the buy-side in terms of liquidity provision. 

“MarketAxess and Liquidnet offer an alternative method of providing liquidity,” the trader says. “It was interesting to see we were able to trade RFQ with the broker of MarketAxess on the platform, MarketAxess Capital Ltd., because they represent anonymous liquidity from different buy-side traders.

“We actually traded more that way during the period. The anonymous trading enables all-to-all buy-side trading, which plugged the gap left by some of the large investment banks that were not quoting as competitively as they used to. We’ve seen some banks with less appetite for risk and quoting business, but others kept strong.”

Rick McVey, CEO of MarketAxess, told analysts on the firm’s first quarter 2020 earnings call that the Open Trading system, an all-to-all platform that allows buy- and sell-side firms to connect anonymously through a central network, saw a record 900 firms provide liquidity during the period, with a majority of 700 being asset managers. Open Trading average daily volume surged 53% year-on-year in the first three months of 2020 to a record $3.4 billion.

“We did see asset managers taking advantage of opportunities when there was heavy selling in the market, and we saw dealers taking advantage of using the platform to take liquidity when they needed to reduce risk. We think that this as an important quarter in terms of the advancement of all-to-all trading.”

ICMA’s report also outlined the protocols that proved more popular with traders as it became more difficult to find three or more quotes, which is often required under internal best execution policies, including the all-to-all RFQ functionality, trading in dark pools and portfolio, or program, trading.

A separate report from Greenwich Associates stated that anecdotally, some investors have found portfolio trading a useful way to adjust their portfolios during the crisis, because they can mix bonds that are easier to trade with ones that are more difficult to execute.

Speaking to The TRADE in March, fixed income platform Tradeweb also revealed 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 Associates suggests that despite advances in technology, portfolio trading remains a largely manual process, and a large portfolio trade could 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. Recently the UK confirmed it would not adopt CSDR, including the buy-in regime, but UK-based firms will still have to adhere to the buy-in regime for all European transactions that are settled with European central securities depositories.

ICMA has been outspoken about concerns with the buy-in regime under CSDR, urging regulators that the move will have a detrimental impact on bond liquidity. Its report also noted a spike in settlement fails at the peak of the volatility.

“When engaging with large portfolio trades in volatile markets, you must pick up the phone every time and check the pricing with the broker,” the buy-side trading head says. “It’s not sufficient to do that on a platform – you need to have a conversation and from that we may remove some lines that the broker has flagged as potentially failing. If I believe the price is higher than the historical bid offer I have in my transaction cost analysis (TCA), I might challenge the broker.

“That’s particularly interesting because when you do that, you mitigate the risk of settlement failure. I think portfolio trading can help the fixed income industry tackle the settlement issue. From my perspective, it’s a strong incentive to flag the line that could cause potential problems. There are large investment banks that decided in their pre-trade module to add columns that indicate the probability of settlement failure, whether that probability is high or low. That is really useful. It helps us fine-tune, change or amend the list that will finally be traded.”

Summarising ICMA’s report, Martin Scheck, ICMA chief executive, said the crisis has provided a clear reminder that despite increasing electronification of trading over the last few years, the role of market-makers in creating liquidity remains at the core of the secondary markets. Reducing the ability of market-makers to provide this will inevitably impact market liquidity and efficiency, especially in times of market stress.

The post What happened to e-trading in fixed income? appeared first on The TRADE.

Now in its fourth year, JP Morgan spoke with more than 650 traders primarily trading foreign exchange, but also other products, to explore trends in electronic trading and the liquidity landscape. The US investment bank found that liquidity availability is the biggest daily concern for a third of traders, followed by other daily challenges such as workflow efficiency, price transparency and best execution.

“As the number of liquidity providers is shrinking, we’re starting to see a lot of recycled risk in the system,” Scott Wacker, global head of fixed income, currencies and commodities e-sales at JP Morgan, commented on the results. 

“Clients really value good and efficient access to liquidity so it’s not surprising that it’s the major concern again this year. Coupled with this, this year we’ve seen some liquidity providers stepping away from the market, which will always heighten the focus on liquidity sourcing.”

Elsewhere in the survey, traders mapped out predictions on the percentage of their trading volume that they believe will be executed via electronic channels. Traders anticipate an 11% increase in the proportion of credit and rates e-trading, according to the results, with commodities and FX expected to increase by 6% and 5% respectively.

The results are in line with a recent report from Greenwich Associates, which found that e-trading has grown to account for 45% of all European fixed income trading volume in 2019, compared to 38% the year prior. The research added dealers that have prioritised investment in technology to support the shift towards electronic trading have gained a significant advantage.

“Traders are acknowledging that electronification is rapidly increasing,” JP Morgan’s Wacker added. “For dealers, developing the electronic market making and the algorithmic trading capabilities is paramount… More and more tools traditionally applied to equities and FX are being applied to credit and rates, driven by increasing available data and better understanding of how to use that data for post-trade analytics.”

JP Morgan was also recently recognised as the clear winner of Greenwich Associates’ 2019 European fixed income market share leaders table. Citi ranked second behind JP Morgan, followed by Barclays, Goldman Sachs, and then HSBC, BNP Paribas and Bank of America Securities, which tied for fifth place.

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Despite increased adoption of low-touch protocols and algorithmic trading in global fixed income markets, bond trading will still need the human touch for large trades and during times of market stress, according to senior buy-siders.

Making the case to delegates as part of an Oxford-style debate at the Fixed Income Leaders Summit Europe conference in Barcelona, two heads of fixed income dealing acknowledged that bond trading will continue to evolve with technology, but the human trader and human relationships will remain a key part of trading fixed income.

“Bond trading will continue to evolve with more data and as new tools to execute trades are introduced to the market, but my problem is how do I transact a block trade during times of high volatility or in an inefficient market,” said Mike Poole, head of fixed income dealing at Jupiter Asset Management.

“Low-touch and algo-driven trading will not work across the board in fixed income. As market participants, we have the ability and duty to ensure the market evolves in a way that allows a number of trading protocols to flourish, including human trading protocols for large transactions that can be executed in a variety of market conditions. My fear is that reliance on a small number of trading techniques will erode relationships that we have built up over decades. Change for the sake of change does not always equal progress.”

Poole continued that while the human element is important, there must be more efficient processes to evolve those human relationships, not algorithmic trading, because it’s the human trader that gets those blocks done and that’s how risk is cleared. David Walker, head of fixed income dealing at M&G Investments agreed with Poole, adding that as many fixed income divisions are scaling back the trading desk, he has been adding traders that are specialised in certain products to the fixed income trading team.

“I’m upscaling my dealing desk with specialised dealers so that they have time to speak to the street and share ideas with the portfolio manager. Sure, electronic trading is efficient and protocols like portfolio trading are good, but I’ve looked at portfolio trading closely and found that the result was not always as good as when we’ve traded those bonds ourselves… Electronification in fixed income has leveled off, and the evolution is over.”

On the other side of the argument, Brett Olson, head of fixed income execution at BlackRock iShares, and Bart Smith, co-head of the ETF Group at Susquehanna International Group, declared that the trend towards the electronification of fixed income trading will, in fact, continue.

“ETFs have kicked off this process,” Olson said. “Dealers have had to rapidly price and trade baskets of bonds and they are evolving with advancements in technology and platforms in mind to facilitate that shift. Not only do I believe bond trading is evolving more towards low-touch, I know it is.”

Similarly, Smith noted that it’s uncommon to hear asset managers asking how they can get more out of high-touch trading relationships, but market participants are increasingly looking to low-touch trading protocols to facilitate more difficult trades.

“This has already happened,” Smith said. “Regulatory pressures have limited the ability for banks to hold inventory and the buy-side have their own regulatory pressures to contend with. Transparency and best execution lend themselves to increased use of technology and low-touch trading solutions.

“Low-cost and low-touch trading continues to put pressure on areas of the market that are inefficient, and eventually that will happen as we see new market entrants and technological innovation. It’s [high-touch trading] just not economically viable anymore. It will continue to migrate upstream. We love human beings, but the ‘equitisation’ of fixed income has well and truly begun.”

The post Heads of fixed income dealing make case for human touch in bond trading appeared first on The TRADE.

The survey on the US Treasury market is aimed at better understanding the trends and challenges borne by buy-side managers who participate in the market.

Aite Group and The TRADE have partnered on the research to uncover insights into the trading of US treasuries, pricing and transparency, and changes we might expect to see over the next 12 to 18 months.

“This is an especially exciting survey to conduct because of the changes we are seeing in the way both on- and off-the-run US Treasuries are being traded,” said Audrey Blater, senior analyst at Aite Group.

“The adoption of tools such as algorithms to transact these securities has enabled firms to focus and specialise on more complex trades and alpha generation.

“Generally speaking, automation and electronification of trading has led to greater efficiencies. We are excited to learn more about the adoption of electronic trading tools and protocols by the buy-side in the market for US Treasuries.” 

The survey will explore, among other things, the buy-side’s adoption of e-trading and what tools they will use, along with off-the-run US Treasuries and packages such US Treasuries traded against swaps, futures, and TBAs.

“Beyond efficiencies in the front office, the e-trading of US Treasuries is supported by straight-through processing – creating efficiencies along the entire workflow chain. This is a process that used to be plagued with manual steps and errors,” added Blater.

“We’ve consistently had an interest in the adoption rates of e-trading in financial markets. While the sell-side often uses electronic and automated means to transact U.S. Treasuries, the buy-side has some catching up to do. This study allows us to take the pulse of this progression.”

To thank respondents for completing the survey, Aite Group will send charts with the aggregate results those who fill in the survey.

A write-up of the results will also be published in The TRADE’s summer issue, available at the end of June.

Readers of The TRADE can complete the survey by clicking this link.

All responses will be reported anonymously and in aggregate. Individual responses will remain strictly confidential, and the report will not include the names of individuals or companies that participate.

If you have any further questions on the survey or wish to discuss, please contact Aite Group senior analyst Audrey Blater, Ph.D. (ablater@aitegroup.com).

The post New US Treasury survey launched by The TRADE and Aite Group appeared first on The TRADE.

The use of electronic trading for corporate bonds has surged significantly over the past few years, with MarketAxess being the preferred e-trading platform according to new research.

A study from Greenwich Associates revealed 84% of investors now trade corporate bonds electronically as of this year, compared to just 69% in 2013.

Similarly, the overall corporate bond trading volume on a notional basis traded electronically has surged from just 8% in 2013 to almost 20% this year.

“The increase in usage from just 69% in 2013 shows how quickly investors are adopting electronic trading and how rapidly electronic tools and venues are maturing,” the report explained.  

High-yield bond trading has seen an even greater surge in electronic trading activity, with almost three quarters of investment firms stating they use an electronic platform this year, up from just 44% in 2013.

It also found 95% of investors that trade electronically - including hedge funds, banks, funds and advisors - have MarketAxess on their desk, which is used to execute 85% of their electronic trading on a volume-weighted basis.

The research explained the surge is partly due to bond trading providers launching new and enhanced data and analytics products, which are acting as a draw for investors.

“In coming years, we will see bond trading venues morph into data and analytics providers, with their liquidity pools as the mere foundation of the business,” said Kevin McPartland, head of Greenwich Associates market structure and technology research, and author of the report.

“The additional insights available to the buy side will help not only traders, but also compliance teams become increasingly comfortable with all-to-all trading, and even, eventually, the idea of buy-side price making.”

The post E-trading picks up pace in corporate bond market appeared first on The TRADE.

According to a report from Greenwich Associates, of 200 investors surveyed nearly 80% said their preferred choice to trade was over the phone. 

It also found only 20% of notional volume from institutional investors was executed electronically last year, and less than 40% of investors utilised e-trading tools.

Incoming rules in Europe will move trading to new electronic platforms called organised trading facilities (OTFs) or multilateral trading facilities (MTFs), as a way to increase transparency and regulate the swaps market.

However, Greenwich’s Kevin McPartland, head of research for market structure and technology, and author of the report, says clients are still placing high value on support provided by swaps salespeople on the phone.

“Even in the US where electronic trading is required, recent Greenwich Associates research showed that swaps salespeople are still critical for executing complex and large trades,” says McPartland.

“These trades often require white glove treatment, and clients work with dealers that are best at limited market impact and providing the support needed to get the trade done.”

The results will certainly deal a blow to operators such as Bloomberg, Tradition and interdealer broker ICAP, which have invested heavily in building these electronic trading platforms.

In November last year, ICAP sold its voice brokering business to Tullett Prebon for £1.11 billion, as it looks to focus purely on electronic trading and post-trade services.

The post European investors refuse to budge in move to electronic trading appeared first on The TRADE.