The Electronification of Emerging Markets Bond Trading
Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA
June 24, 2020
A transformation is underway in the fixed income market, sparked by the growing adoption of electronic bond trading. We caught up with the team at MarketAxess, an electronic trading platform for fixed income trading. MarketAxess shared some interesting insights on how rapidly the market structure is evolving and the potential impact on emerging markets bonds as technology helps to connect disparate brokers and investors and improve the flow of information.
Automation Eases Execution and Access
Platforms like MarketAxess help ease execution by automating manual processes—bond trades can be made without even picking up a phone!—and add transparency, improve liquidity and enhance competition. The move towards electronic bond trading started with automating requests for quotes and enabling all-to-all trading, and a new wave of adoption may be spurred by the use of artificial intelligence to price corporate bonds. MarketAxess has started applying this capability to local emerging markets, where data tends to be harder to access.
A Greenwich Associates study found that U.S. investors have migrated approximately 20% of their investment grade bond volume to electronic platform and are increasingly looking to use these platforms for emerging markets debt.1 The research firm found that 70% of U.S. investors are already trading emerging market fixed income products electronically.2 In 2019, MarketAxess saw a 30% increase to $0.5 trillion in emerging markets bond trading volume on its platform.3 It is seeing particularly significant growth in trading on the platform in Asia, Europe and Latin America.
All-to-All Trading Opens Liquidity Pool
MarketAxess’ all-to-all trading protocol, Open Trading, allows non-dealers to trade anonymously with other non-dealers and has become a major source of liquidity, disrupting the traditional model of banks being the sole supplier of liquidity to the buy side. According to MarketAxess, on a single day in February, almost $1 billion in volume in the platform came from banks taking liquidity.
While some small brokers and other non-buy side customers trade through Open Trading, it represents a lot of end-user to end-user transactions. Across the entire MarketAxess platform, 28% of volume went through Open Trading in 2019. The numbers were even higher for high yield corporate and emerging markets bonds, with 50% and 38% of volume, respectively, going through Open Trading.
Block trading on electronic platforms is also growing significantly. For years MarketAxess and other platforms were used mainly for trades of $5 million and below, but that is changing. Using MarketAxess’ Request for Market (RFM) protocol, investors trading emerging market local currency bonds can receive two-way pricing, enabling them to trade in larger sizes. While the average size of block trades in Asia is $8 million, MarketAxess as seen the use of RFM lead to trades as large at $60 million in Asia and $260 million in Latin America.4
Forces of Disruption: Electronic Bond Trading and Bond ETFs
The move towards electronic trading of bonds has also been driven by the rise of bond ETFs, which have themselves been a disruptive force in the bond market, changing how the underlying bond market is traded. We believe the efficient trading of entire baskets of bonds has been enabled by electronic trading and, at the same time, is helping to drive demand for electronic trading, particularly in more liquid segments.
While the number of bonds available in the secondary market has fallen way down over the last decade, liquidity in bond markets has by no means gone the same direction. Traditional banks, in fact, remain significant players on this platform. But they have a lot of company, and the evolving structure appears to be making up for their reduced ability to take on risk.
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