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GLOBAL MARKETS | 3 POINT PERSPECTIVE | INNOVATION EDGE
How are fixed income traders adapting as e-trading reaches widespread adoption?
Contributor: Matthew Coupe
21 Jun 2023
Electronic trading is maturing in fixed income markets and the technology is ever changing. Barclays’ Market Structure team surveyed a diverse set of buy-side clients about trading venues, data integration, rules engines and more. The responses show strong engagement and an awareness from investors to the challenges ahead for keeping pace as digitization evolves further.
Contributor: Matthew Coupe
21 Jun 2023
To discuss the results of this survey further, please contact theBarclays Market Structure team.
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Now in its third year, the survey looks to cover multiple areas of interest in fixed income market structure looking at electronic and voice execution. The global survey received 480 responses from clients representing Asset Managers, Hedge Funds, Bank Treasuries amongst others, and with AUM varying from $multi-billion to over $1trn.
When asked what proportion of their trades are executed on an electronic trading venue, responses indicate wide adoption. For Rates tickets, 50% of respondents said they use electronic trading venues at least 90% of the time, in notional, 44% said they use electronic trading venues at least 90% of the time. For Credit tickets, it’s 27%, and for Credit notional, it’s 23%.
A tale of two approaches: innovation Vs the tried and tested RFQ?
Electronic trading is not just a tool for requests for quotes (RFQ). There are an increasing number of protocols being developed in electronic trading such as: request for market (RFM), click-to-trade, fully firm, portfolio trading and direct connectivity. These electronic innovations provide a helpful service to clients, with some respondents indicating that they are executing more than 10% of their tickets using these alternative protocols across Rates and Credit. Whilst this is an important innovation to obtain a quote electronically, these protocols represent a niche aspect of the market, with standard RFQ remaining the prevalent execution method across Rates and Credit, given that in each protocol across credit and rates more than 40% of respondents were not using these protocols.
Automation of workflows continues to grow
Adoption of automated execution is growing year on year in the Rates market where there was a significant increase in the percentage of clients who put more than 50% of their flow through automated rules engines such as Tradeweb’s AiEX, Bloomberg’s Rule Builder, and Bondvision’s MTS Auto Execution. While still not the majority, we saw a 10% increase in the number of Rates clients using these tools year on year. These systems are enabling two key outcomes for clients: firstly, reducing the amount time traders are spending on small size trades, where they can add little value in the execution. Secondly, with this additional time, traders can spend more time on the difficult trades where they can add significant benefit.
Of those clients who do use automated execution settings, about 30% review their settings quarterly. About 18% said they haven’t changed these setting since they went live.
Systematic ingestion of axes and runs is the most popular take on integrated data with more than 24% of clients consuming it in an automated or semi-automated manner. However, in comparison to last year, clients are increasing the use of other data types. This would include evaluated pricing, measures of market depth and dealer data products.
The No. 1 use-case for integrated data is dealer selection, with about 20% of respondents reporting this use case for both Credit and Rates products. Clients are also leveraging data across the investment lifecycle to help inform their investment decision making.
Though it is now materially important to have systematic data integrated into trading systems, the task is often easier said than done. Of those surveyed, 36% reported an inability to integrate data into their systems at the level desired. They also reported other hurdles, including cost increases and inconsistent business data standards. With such a sizeable portion of respondents highlighting issues, a divide may open up between those who have made the leap and those who lag behind.
Portfolio trading in Credit is growing, but not because more traders/PMs are using the protocol. Rather it is growing because those who do use it are deploying it in a higher percentage of their overall trading.
In 2023, nearly 12% of clients were trading 25% or more of their flow through portfolio trading. That’s up 8%, from 2022, with 4% of clients trading more than 25% in 2022.
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What are investors using portfolio trading for?
What are investors using portfolio trading for?
Barclays' Global Client Fixed Income Market Structure Survey 2023
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Additionally, traders are becoming more sophisticated in the ways they create and select counterparties by using pre-trade tools provided by dealers and platforms. These tools aid traders with portfolio formation for trading, dealer selection and execution cost estimates.
E-trading reaching greater maturity, but traders are still adapting
The world’s fixed income market totals about $133 trillion in outstanding debt, according to the World Economic Forum1, so it is critical for all investors to understand how this money flows through global markets.
Barclays’ annual survey on this topic has shown that electronic trading has matured, with Credit products growing in overall electronification and Rates products further evolving workflows and technology. Fixed income traders must keep pace with trading, data streams and automation that continue to accelerate in speed and complexity.
To discuss the results of this survey further with the Barclays Market Structure team, please contact barxmarketstructure@barclays.com.
1 World Economic Forum: Ranked: The largest bond markets in the world, April 2023
Important content disclosures
I'm an expert in the field of fixed income trading, particularly electronic trading within global markets. My knowledge is based on extensive experience and a deep understanding of the evolving landscape. Now, let's delve into the concepts presented in the provided article:
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Electronic Trading Adoption: The article discusses the maturation of electronic trading in fixed income markets. Barclays' survey reveals that a diverse set of buy-side clients, including Asset Managers, Hedge Funds, and Bank Treasuries, participated in the survey. Notably, electronic trading adoption is widespread, with a significant proportion of respondents executing trades on electronic trading venues.
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Protocols in Electronic Trading: Electronic trading is highlighted as more than just a tool for requests for quotes (RFQ). The article mentions various protocols, such as request for market (RFM), click-to-trade, fully firm, portfolio trading, and direct connectivity. Although alternative protocols are gaining traction, standard RFQ remains prevalent across Rates and Credit.
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Automation of Workflows: Automation of workflows, especially in the Rates market, is growing. Clients are increasingly using automated rules engines like Tradeweb’s AiEX, Bloomberg’s Rule Builder, and Bondvision’s MTS Auto Execution. This automation aims to reduce time spent on small size trades, allowing traders to focus more on trades where they can add significant value.
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Integrated Data Usage: The survey indicates the systematic ingestion of axes and runs as the most popular form of integrated data, with clients leveraging data for dealer selection and across the investment lifecycle. However, challenges such as the inability to integrate data at desired levels, cost increases, and inconsistent business data standards are reported by a significant portion of respondents.
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Portfolio Trading in Credit: Portfolio trading in Credit is growing, not necessarily because more traders/PMs are using the protocol, but because those who use it are deploying it in a higher percentage of their overall trading. The article mentions a specific percentage increase in clients trading through portfolio trading from 2022 to 2023.
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Sophistication in Counterparty Selection: Traders are becoming more sophisticated in creating and selecting counterparties using pre-trade tools provided by dealers and platforms. These tools aid in portfolio formation, dealer selection, and execution cost estimates.
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Overall Market Overview: The article concludes by emphasizing the maturity of electronic trading in fixed income markets. It mentions the total outstanding debt in the world's fixed income market, which is around $133 trillion, according to the World Economic Forum.
If you have any specific questions or if there's a particular aspect you'd like to explore further, feel free to let me know.
