I can only echo the sentiments of my colleague Carlota in her recent blog about FILS 2021 — it was such a treat to be back at a live event. Debating current trends and catching up with clients and peers in this type of environment is something that won’t be taken for granted in the future.
Like Carlota, a highlight of the event for me was the panel session on advanced automation for fixed income. It was great to see Broadway CEO Michael Chin contributing to a discussion so relevant to the future of our industry, delving into how ongoing technology advancements are empowering human traders to respond to dynamic market trends.
There were several other interesting discussions on areas that are having a big impact on fixed income market structure during the event that I enjoyed:
As Voice Trading still represents 50% of credit trading and 60% of EMKT trading, the big challenge is how to digitalize and leverage this type of data and how to electrify the voice workflow, especially for higher sizes. One of the barriers to digital transformation in this area is that voice flow leaves the least footprint in the market. Another issue is information leakage, which it was suggested could be avoided if voice flow was based on discretion or only for orders executed over a long period of time. And we can’t forget that the rise of the credit exchange-traded fund (ETF) has also been significant in shifting bond trading protocols.
The current trend indicates that portfolio trading will continue to grow as the most cost-effective way to trade credit, whenever it makes sense, with the level of adoption linked to the ability to prove the merits of best execution to investors versus other traditional protocols. Since 2019, portfolio trading on credit has grown to be approximately 6% of the total market, is now being used for high yield (HY) and emerging market (EM) credit, not just for investment-grade credit, and boasts between 250 and 500 line items. Three main factors have contributed to this uptake:
The rise of the Credit Exchange Traded Fund (ETF); liquidity providers like Jane Street or Flow Traders now have better tools to analyze baskets. This allows them to scan the list of bonds to identify the more difficult/illiquid bonds and provide a quick response to RFQs.
Advances in technology from platform providers
Automation in fixed income, particularly through portfolio trading, has improved efficiency by allowing traders to focus on alpha-generating opportunities.
Buy-side traders are seeing their sell-side counterparts offering direct streamed prices, executable prices and AXES, as an alternative source for data and direct trading – and dealers now see this as a direct route to greater trading efficiency. The buy-side continues to invest in sophisticated Execution Management Systems (EMS’s) because they need both liquidity and data to enable trading automation.
It was also noted that e-trading margins are being squeezed at banks as they face increased trading fees from the platforms.
And finally, a short note on REPO trading. It was great to hear the increased adoption on electronic trading by the buy-side and how they are looking to leverage new technology to trade repos more efficiently. This is an unstoppable trend, and Broadway has been investing a lot to provide new solutions and help our sell-side clientele to trade repos more efficiently with their customers, with a higher level of automation and innovation.
It was also remarkable to see the impact of innovation in the Repo market. The use of distributed ledger technology (DLT) for intraday repo collateral transfer is clearly emerging as a trend which is poised to change the repo market. How much and how quickly remains to be seen, but definitely a topic to watch.
I’m excited to hear how these themes and predictions have evolved during the next FILS conference, and can’t wait for the next chance to interact with our amazing fixed income community.