The electronification of trading

HomeBlogsThe electronification of trading

There can be no doubt that trading, across all asset classes, is moving inexorably towards complete electronification. It’s a matter of when, rather than if. Equities and FX have already passed tipping point and next on the list is the fixed income market. Celent has estimated that over 50% of buy-side fixed income trading will be electronic by the end of the year.

Indeed regulation is the driving force in the electronification of fixed income markets. Transparent trading on SEFs in the US and OTFs in Europe will force the change to electronic trading. Under MiFID, there are requirements for post-trade reporting and transparency, best execution and execution quality and record keeping which are obviously much more easily done electronically. The search for liquidity is also forcing the pace of change. A recent Charles River survey found that 53% of fixed income traders see the greatest challenge they face as discovering and accessing liquidity. New electronic platforms are offering traders access to markets and data that would have been unreachable before the introduction of e-trading.

The majority of trading in fixed income is on the secondary market and involves vanilla trades which are relatively simple to execute. It’s when it comes to more complex products that complete electronification may not be the answer. Whilst price discovery, clearing and settlement are obvious candidates for electronic trading, execution may not always be.

More complex trades and less liquid instruments are still voice traded – FOW estimate that 50% of U.S. government bonds and 80% of credit markets and corporate bonds are still traded telephonically. Although advances in technology and regulatory pressures will drive increased electronification, there will always be a place for voice. True, e-trading platforms are fast becoming the norm, but there still needs to be human oversight to preserve market integrity. Both in terms of compliance departments inside market participants and inside regulators.

As a result, the move to electronic trading while positive, will not always be the best option. Many complex fixed income trades will only work OTC, and some counterparties prefer to trade telephonically. For these, voice will always have a place. Customers will still want someone to talk to – to get a feel for the market or to explain their strategy. There will always be a place for a conversation between market participants when a house sitting on a very large position wants a quiet exit. Timing and sequencing of linked transactions will likely prompt a party to pick up the phone. And an asset manager will often prefer to hear company analysis delivered vocally.

Trying to turn back the tide of electronification in fixed income is futile given its fundamental ability to promote transparency and increase compliance. There is simply too much regulatory weight. That said human interaction cannot be entirely automated.
The successful trading desks will be the ones that understand that there will always be a place for man (or woman), alongside machine, in the bond markets.

 

Female teacher addressing university students in a classroom

Colt Technology Services

18 August 2015

 

Recent blog posts

Raymond Meju

I remember in my interview for Colt I was asked who the most influential person in my life ...
Continue Reading

Laying the foundations for 5G and the IoT

The fascinating paradigm we’re currently facing is that, as the world disconnects from cables and moves wireless and ...
Continue Reading

Colt to connect to Oracle FastConnect in Japan; as Oracle furthers its footprint in Asia

Colt Technology Services continues to drive secure, reliable, low latency and high bandwidth connectivity to the Oracle Cloud ...
Continue Reading