ICE on Financial Service Trends and Why Machine Will Never Replace Man and ETF Futures

  • Magnus Cattan, VP at ICE Fixed Income & Data Service APAC

  • 28.09.2022 11:04 am

Ahead of its November conference happening in Singapore, the Fixed Income & FX APAC Summit team spoke to Magnus Cattan, who has been in the financial services industry for 23 years. Starting his career working in fixed income pricing, analytics and data collection in London, he became fascinated with fixed income in Asia early while working on his first project early in his career. Today, Magnus Cattan is the VP at ICE Fixed Income & Data Service APAC.

You mentioned in a recent article that digitisation of fixed income trading is adapting to less liquid markets, with far reaching implications for Asia-Pacific and that you’ve seen clear trends in the way financial services technology is being adopted.

If I go back and look at some of the studies that came out around 2016 by ICMA (the International Capital Markets Association) it was estimated that 80% of equity could be considered liquid, whereas about 70% of the fixed income market would be considered illiquid, which presents a challenge and an opportunity at the same time.

Around five years ago, electrification really started to pick up steam. One of the biggest concerns in the fixed income space surrounds information leakage. If you're trying to sell a particularly large size of a bond, you don't really want lots of people to know, because that can have a meaningful impact on the price. At that time (five years ago) people were looking at dissecting the market in different ways.

The pandemic really accelerated the move towards becoming more electronic because more institutions were in a work environment where they were not able to go into the office, meaning electronic tools became more critical across the industry. Looking at how electrification has evolved, you see things like asset trading or portfolio trading starting to pick up in North America and Europe, and it's starting to pick up in Asia Pacific too.

How are companies leveraging innovations in electronic trading?

Electronic trading has picked up and when we speak with customers across Asia Pacific, that’s what they've told us. It's somewhere between 20% and 50% depending on the customer. If they are a large institution like a large buy side firm, closer to 50% of what they trade would be electronic. For smaller, more regional firms it's likely to be lower, around 20%. Certainly, it's becoming more popular, and I see that only continuing as the sell side starts to adopt things like algo trading in the fixed income space, potentially looking at some of the smaller transactions, supporting the private banking business or others where they're not necessarily doing large trade sizes. Electronic trading could be beneficial to allow traders to spend their time on larger, more complex types of trades which are still manual. And, in my view, in the next three to five years, this will only continue to pick up steam in Asia-Pacific.

Can you elaborate on these trends, what specifically have you seen and what do you expect to see in the next three to five years?

In the next three to five years, I see a couple of things happening. First, I believe indexation will pick up. The rise of passive products, things like ETFs or index funds picking up, which lends itself to more electronic workflows that don't really exist today. If you look at ETF markets, the creation and redemption process is still pretty manual, particularly in Asia. It’s relatively inefficient globally, but it’s certainly the case in Asia. In the ETF markets, you're going to see more electrification, which is then going to boost things like portfolio trading and basket trading because that naturally lends itself to the ETF ecosystem.

I believe we’ll see that area grow as well as a consolidation of electronic venues, which is already taking place. I don't know what the exact count is but the last time I looked, there were around 120 different electronic trading venues globally. That number has likely increased now, and I believe you're going to see consolidation because the buy side is not going to want to connect to 50 different electronic venues. They're going to want to minimize the amount of technology they need to leverage, while maximizing the amount of liquidity they can access. I think you'll see a consolidation of liquidity venues taking place.

Finally, I think we’ll see the adoption of more data and analytics to drive the investment or the trading decision process. We’re starting to see things like transaction cost analysis coming into play and liquidity analysis. This will only continue because it helps firms make better decisions.

Do you think electronification is likely to replace human oversight and intuition and humans be replaced by machines? What are your thoughts on how companies can leverage innovations in electronic trading?

There is not a homogenous set of structures out there. You've got to consider things like debt instruments that are issued in Malaysia, as the Malaysian market could have a very different structure to debt instruments that are issued in China for the CNY. This makes it challenging to think about trading everything electronically because it's not homogenous. It’s likely you’re always going to need a voice element or a bilateral negotiation for reasonably large portions of the fixed income marketplace. Ultimately electrification will complement analogue trading rather than replace it.

Increased electrification, and the proliferation of data and analytics, can help the investment decision making process and the trading process. Electrification is not going to replace humans. It's ultimately going to complement what we do and bring value to what traders are doing.

In your view, how will rising inflation, withdrawal of liquidity, after effects of the pandemic, political conflicts and other geopolitical factors affect trading in the next five years? What can be done to navigate such uncertainty and rocky terrain?

It’s an interesting world that we live in now. I think back to the global financial crisis and whilst it's not the same, there are certain similarities as things become more volatile, especially if liquidity starts to dry up. Ultimately transparency and data is what firms will value, because the more data you have, the more likely it is that you're going to be able to avoid potentially rocky situations or take action on areas you want to improve. Risk management will be key, and we’ve learnt lessons from the financial crisis and many firms have implemented sophisticated risk management systems, so I believe that is going to be key in navigating these different factors successfully. Data and risk management are going to be paramount.

What do you find most valuable about being a partner of FIFX APAC?

Fixed Income brings together a diverse range of participants across a diverse region with a diverse set of perspectives. It’s one of the more engaging conferences from an audience participation point of view. I remember vividly- I think it was the first or second one in Singapore, where somebody was presenting on automation and how technology would replace human beings, and it created a huge debate among the audience. In fact, it led to someone having a financial bet that it would happen, which I don't think I've seen in other conferences.

It's important because fixed income is a very developing and complex asset class, so bringing together participants from across the region is very important. It's the only event where you really get that focus on this asset class at a regional level, so bringing diverse participants together to engage in conversation, is invaluable.

Magnus will be speaking on the 23rd November 2022, 9:50am Fixed income APAC on:

"Future-proofing your trading desk in a post-pandemic environment – How can you leverage innovations in electronic trading and big data as key differentiators to drive growth and achieve agility?"

Buyside complimentary passes are available, and Financial IT readers can enjoy 15% off prevailing rates by quoting “FIT15” on checkout.

Find out more about this year’s topics and speaker lineup here.

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