Taking the temperature on e-fixed income trading in the US
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30 September 2013
I participated in a Trade Tech West panel a week or so ago on e-trading and it was a good time to take the temperature of the adoption and attractiveness of electronic trading in US corporates by the buyside. The panel consisted of a couple of buysides and me so it was objective in terms of a real status check. The panel agreed that the major themes were as follows: 1. Bond markets remain split between continuous (odd lot mostly) and discontinuous market models (round lots or institutional trades) 2. Dealers are increasingly moving to a facilitation role 3. Inventories- still flat to down....and still an issue (pun intended) 4. Capital requirements remain onerous 5. The job description of a Fixed Income sales/trader is impossibly broad- making e-adoption something on a laundry list of other functions to support besides normal client service 6. The buyside is getting up to speed on the array of options out there- that being said, Bloomberg and MarketAxess came up a lot. Admittedly, this was an equities audience so they would not be familiar with all the other options out there, so the panel mentioned the market leading multi-dealer MD2C platforms. The tools in high demand will depend on the rate of market adoption and successive changes in market structure, but the laundry list remains: Smart order routers Aggregation tools OMS/EMS functionality My thoughts that I conveyed to the panel were that, for the buyside, order books developed for odd lots can be used to supplement liquidity- some of these EOBs are slowly allowing the buyside to be price setters (Bonds.com is an example). Also, whole the market will increasingly become interconnected over time, this is a major problem at the moment. As for best execution, it is a concept but not a pervasive business practice. For dealers, they are rolling out innovative D2C technologies, including crossing (with some capital commitment), fuzzy matching and other utility models for liquidity seekers. Balance sheet optimization remains a major theme for dealers, as does the informational balance sheet, which is a concept we will explore going forward.