Technological Innovations, New Liquidity Channels, and Shifting Market Dynamics in European Fixed Income Trading
Now the shockwaves sent through global industry by the COVID-19 crisis have begun to subside somewhat – at least in the developed world – and people are attempting to return to some semblance of their regular pre-pandemic existences, it’s a good point in time to take stock, assess where we are as an industry, and what we see as the “new normal” from our corner of the globe.
As if to answer this very call, a new report - Technological Innovations, New Liquidity Channels, and Shifting Market in European Fixed Income Trading – has just been released by WBR.
You can download the report for free today, but let’s have a little preview of a few of the more interesting findings from the research.
A lot is said these days regarding digital transformation, and it seems FX trading is sitting on something of a knife edge when it comes to electronic trading. While 30-50% of trading is now being carried out on electronic platforms the majority of volume is still comprised of voice trading. This could mean the industry needs to work much harder to innovate and promote the use of electronic trading platforms.
“These results do not surprise me – over the last few years there has been an increase in adoption of electronic trading technology and platforms to streamline workflows,” said Irene Cerquaglia, Conference Director, Fixed Income Leaders Summit Europe 2021. “However, the electronification journey still has a long way to go, relying on having better data which remains an expensive and imperfect resource. Nevertheless, more electronification means more observable data, which will lead to more automation.”
The pandemic saw a sharp spike in portfolio trading – In just a handful of months, JP Morgan executed 77% of the total portfolio trading volumes it executed in the US throughout last year for example. The reasons for this surge in uptake can be attributed to the fact portfolio trading can provide a method of offsetting the increased market volatility through guaranteed instant execution. However, now things are starting to settle again, portfolio trading is finding itself stabilising – hence the negligible results seen above.
“Generally, I expect portfolio trading to increase over the next year,” said Cathy Gibson, Global Head of Trading, Ninety One. “I think depending on your book of business, and again if you are trading something similar to the composite of an ETF or index, it can be an easy way to move large size and money quickly. On the whole, I think it’s going to increase, but it won’t suit everyone.”
The decisions of centralised governments and the economic damage caused by the pandemic are clearly huge concerns for the FX trading business. Market volatility and economic uncertainty are driving the need for FX trading to mitigate operational risks and settlement through shrewd decision making, the establishment of reinforced infrastructure, and mechanisms such as continuous linked settlements on the buy-side. Implemented effectively, these steps should help mitigate the worst of the damage caused by the pandemic and reduce settlement risk exposure.
“This is a big question,” said Ricardo Goddard, Head of European Credit Trading, Schroders. “It is the market impact of the withdrawal of central bank purchases that is probably the greatest challenge on the horizon, though it is not yet imminent. They have put a lot of money into the markets, which has enabled a lot of companies to issue debt, and it has enabled asset managers like ourselves to sell bonds into that demand and to recycle that capital. Withdrawal impacts of that nature are quite significant, we’ve seen a few cases like this in the past.”
Final Thoughts
Fascinating stuff, we think you’ll agree! It’s encouraging to see how the industry is doing everything it can to mitigate the challenges of the COVID-19 crisis while simultaneously leveraging as much opportunity as possible.
If you want the full story on how the FX Trading business is coming out of the pandemic swinging, download the full report – Technological Innovations, New Liquidity Channels, and Shifting Market Dynamics in European Fixed Income Trading.