APAC Fixed Income Waits for Next Catalyst in Electronic Trading
Electronic trading in fixed income has stalled in Asia, but the roadmap for growth is there and so are the platform providers.
Integration between different trading platforms as well as internal buy-side systems and smarter information processing are the main requests for buy-side traders to invest in and trade on electronic fixed income platforms.
Improvements on existing workflow, access to additional pools of liquidity and the resources of platform company are major concerns for the buy-side. It is a considerable effort to invest and on-board a new platform, so buy-sides want to be sure they are investing in a stable platform, and one that can make the information on the street more useful.
“The ability to integrate with our front and back office is key,” explained Josh Wong, Portfolio Manager for Atlas Asset Management. Trade-ready access to information and a multi-asset platform would also be attractive, Wong said, speaking at the Fixed Income Leaders Summit APAC in Singapore.
An ability to continue evolving is another key need, suggested Jerry Jarrell, Principal at Vantage Investment. “Change is rapid at a regulatory, counterparty and macroeconomic level. We are looking for platforms that are aligned with our needs, and can continue to evolve with the marketplace,” Jarrell shared in an opening panel on the buy-side’s wish-list.
Among the panelists, most use electronic trading platforms for fixed income, but the penetration varies both by firm and by trading strategy.
Electronic trading divides by value and volume for larger buy-side firms. Electronically, the volumes are larger, but the value of trading over voice is higher for many firms. Buy-side desks with a large amount of daily maintenance flows are more willing to be open with the street over electronic platforms.
Most trades are still executed on voice, according to a head trader at a large buy-side. For Asian local bonds, there is a desire to move into electronic platforms, but many questions remain.
Size is also a major factor because big blocks risk information leakage. Electronic trading is for efficiency of execution. Outside the electronic trading platforms, buy-sides look for nimble solutions that leave minimal footprint in the market. Efficiency of price discovery remains the number one priority.
Meanwhile, Atlas’ Wong says that, as a portfolio manager, the majority of his team’s price discovery work is still verbal, while trading is largely done over voice. For an electronic platform to capture more of his desk’s flow, it would need to provide benefits either through additional liquidity or operational efficiency in the form of multi-asset functionality, Wong noted.
To understand the weak points in current offering, certain large buy-sides are examining where their traders’ time goes. By aggregating flows and axes, a desk can build their own central limit order book. While some axes are priced better than others, traders must spend a lot of time applying qualitative judgements to information.
It is hard to have a single picture of liquidity, was the consensus on the panel. To amalgamate orders into one place is time-consuming and a platform that improves efficiency and shortens our reaction time.
Piecemeal platforms are the limitation Wong encounters as a portfolio manager. “An integrated platform that handles execution and flows straight into our portfolio management system would allow us to book trades into our systems and make sure all our risks are more accurately measured, reflected and reported,” Wong said.
Regardless of the new features platforms develop, some customisation is inevitable, but the question is how easy is it for investors to customise it themselves, panelists agreed.
The aim is for a balance between realistic execution strategy and what the market can realistically offer, however, greater integration into workflow processes reduces errors and makes a platform scalable as well as more robust.
The level of customisation at global firms also depends on the view from headquarters. Infrastructure is often determined by a buy-side’s headquarters, but there can be leeway for regional requirements to accommodate local regulations and market structure. Nonetheless, having local ownership is also important for establishing buy-in.
As ever, the key for convincing headquarters, as well as the local trading desks and portfolio managers will be a platform’s ability to find additional liquidity pools. Each new platform must offer a new dimension and thereby add value to execution.
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