The electronification of Fixed Income trading continues unabated according to the most recent Sell-Side Fixed Income Expert Network Report, produced by Acuiti in association with valantic FSA. Over 75% of the Expert Network, a group of senior sell-side fixed-income executives from across the globe, reported that flow to electronic trading platforms from their client base had increased during the first half of 2022, with over a quarter of the network pointing to a significant increase.

Volume spikes and volatility over the last 12 months have led to continued changes in execution methods. 41% of respondents noted a shift in previous relationships between trade size and execution method, with larger trades executed by voice but smaller trades electronically.

“Many market participants noticed this pattern during the Covid-19 volatility of March 2020 and it now seems to be a fairly settled characteristic of fixed income execution during periods of volatility.” according to Andy Browning, Head of Electronic Trading, at valantic FSA.

While the recent volatility has brought benefits to the sell side in terms of higher trade volumes, many have faced significant operational challenges. Members of the Expert Network reported that the major operational pain points caused by volatility were seen in risk management and hedging.

Some trading desks tended to revert to manual management of hedging during periods of volatility. This was driven by fear that firms’ automation of this function was not robust enough to keep the right hedging ratios in turbulent markets.

Will Mitting, Managing Director of Acuiti noted “The expectation was that this behaviour would change back to automation during more becalmed conditions. In the long term, executives across the sell-side are targeting greater levels of automation in the hedging process.”

Almost 60% of respondents said that clients were asking for more algorithms to use in their fixed-income operations, and almost a third reported demand for algos used to hedge positions, reinforcing the drive towards hedging automation.
The report also explores client preferences for third-party and dealer e-trading platforms, the use of messaging systems, and how they are addressing barriers to investment.