Corvil Senior Trading Strategist, Voyta Karas, has been enlisted as a moderator for today's FIX Trading Community Americas Briefing, to oversee critical discussions around the developments, challenges and opportunities arising from electronification of the fixed income markets.

Electronic trading has become an increasingly important part of the complex and highly competitive fixed income market landscape. It is driving changes in the market structure, the process of price discovery as well as how liquidity is provided.  New and existing entrants are rapidly offering more automated trading options and innovating in new methods to foster liquidity, automation and efficiency.  According to a survey by Greenwich Associates[1], almost 85 percent of surveyed investment grade investors use electronic trading, as do close to 73 percent of high-yield investors.  

Further, with trading volumes in interest rate futures overtaking those in U.S. Treasuries for the first time and looking on track for further growth[2], this creates a more complex trading environment (OTC and Exchange) that lends itself to more automated routing technologies and TCA analytics.

Greenwich Associates also investigated the state of electronic trading for corporate bonds[3], and while 76 percent of corporate bond investors say it is easy or extremely easy to execute orders up to $5 million, trades over that amount continue to prove difficult for investors to execute.  While these large trades only make up one percent of the total orders in the market on a given day, they still make up over 40 percent of the notional traded.

"Today the challenges are enormous for participants navigating the evolving roles between buy-side and sell-side players, dealing with fragmented liquidity, and doing so in a cost effective manner," said Karas. "The role of technology here cannot be understated.  The race to gain better access to liquidity favors those that leverage technology to gain insight from trade flows and optimize their system performance."

As a significant source of public and private financing (and by virtue, economic growth and jobs creation), regulators are flexing their muscles to improve the functioning of global bond markets. The Board of the International Organization of Securities Commissions (IOSCO), has just published recommendations[4] for improving the information on secondary corporate bond markets available to both regulators and the public.  It states that regulatory authorities should consider steps to enhance pre-trade transparency in corporate bond markets and implement regimes that require post-trade transparency.

Satisfying regulatory transparency requirements remains a pressing concern for market participants. According to a November 2017 report from Greenwich Associates[5], fixed income dealers are spending as much as $20 billion a year on RegTech to help them comply with the raft of regulations covering their trading desks.  

Corvil also sees the conversation shifting from the electronification of fixed-income to who and where to get the best data and insight sources to enable those who create liquidity and those who need it.  While MiFID II and TRACE have made the market more transparent, the next mile for market participants is to understand what this data really means to them.

Within Rates markets, the continued growth of government deficits and the need for liquidity, as the NY Fed reduces its balance sheet, are materially impacting the supply of bonds circulating and impacting liquidity.  As volatility increases within these more mature and increasingly algorithmic electronic fixed income markets, participants must gain greater insight faster about transactions and counterparties to compete. 

David Murray, Corvil Marketing and Chief Business Development Officer adds: "At the heart of improving transparency and execution performance is data analysis and accommodating new granular, voluminous, and temporary or in-transit data sources.  This is both a 'big data' and a 'continuous data' problem.  For both buy-side and sell-side participants, the ability to gain rapid, continuous insight from transaction data and use non-traditional sources to evaluate market and counterparty performance is a powerful ally.  As electronification evolves, the improved ability to measure creates new opportunities for industry benchmarks, which help define exceptional performance. Above all else, bringing "insight" to the darkness is always the greatest protection and competitive edge in changing, fast-moving markets."