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How the Pandemic Fueled a Revolution in Fixed Income e-Trading and Algorithmic Trading

Stress testing fixed income liquidity through a unique global crisis.

Adam Green
Sep 14, 2020

For years, equity traders enjoyed many innovations that fixed income traders could only dream of—including e-trading and its flashier byproduct, algorithmic trading. Now, e-trading and algorithmic trading have made their way to the debt markets as well, where they are finally getting the opportunity to improve liquidity, save costs and enhance execution quality. But as the adoption of these technologies’ spreads, so does the need for rapid access to the market data that drives them. Unfortunately, that’s no easy task in an industry accustomed to trading over the phone between counterparties.  The market’s legacy infrastructure is long overdue for a wide-ranging upgrade. However, infrastructure investments are rarely popular budget items.

Then came COVID-19. Suddenly, traders who had always been tied to their desks weren’t allowed anywhere near them. Working from home became the norm—and so did e-trading.

Finding new ways to keep trades flowing

The transition was surprisingly smooth. In retrospect, the lack of hiccups shouldn’t have come as a surprise at all. The barrier against e-trading has long been mostly psychological. Pre-pandemic, virtually all trading took place onsite at a desk using a terminal or over the phone. COVID-19 forced firms to recognize that many inquiries can be—and should be—sent electronically, eliminating needlessly repetitive tasks such as a live person receiving a call, repeating the inquiry back to the trader, and relaying the message back to the client. When the size of a trade is significant—over $5 million, for example—a certain reluctance to send the trade electronically is understandable, given concern that an inquiry will get less attention if a senior salesperson isn’t presenting it. But sending trades under $5 million via electronic platforms like MarketAxess and Tradeweb has produced no observable issues, other than challenging the status quo.

E-trading momentum will continue to build. Europe has felt more comfortable with e-trading over the past few years. Now that America is awake to its benefits, it won’t be going back.

Innovation begets innovation

With e-trading unlocked, new winds of innovation are ready to stir up the fixed income markets, unleashing a virtuous cycle of increased liquidity and data improvement. Over time, technologies like NLP and AI will enable analysts to cover a far wider range of previously uncovered companies. That coverage, in turn, will enable mutual funds to feel comfortable holding and trading a much greater breadth of fixed income securities, enhancing liquidity across the spectrum. All that new trading activity across the universe will generate even more data to be captured, analyzed and acted upon, leading to even better comparison analysis, cohorting and risk management. New insights will lead to new trades, which will lead to new insights, and on and on.

As this virtuous cycle evolves, the mission of the YieldX platform is to make sure advisors and individuals don’t get left behind. Our users have the ability to route orders against institutional trading desk liquidity—not just custodian platforms. They can build portfolios optimized for liquidity and risk, and curate custom universes of securities from which to build portfolios in the future. Putting these capabilities in the hands of smaller players let’s all participants enjoy their share of the electronic revolution underway.

COVID-19 brought an abrupt end to the argument over whether e-trading would ever come to the debt markets. It’s here. Naturally, OTC trading of large blocks and illiquid bonds will continue, just as it does in the equity market. But the pandemic forced the industry to start upgrading the infrastructure needed for algorithmic trading, open trading and portfolio trading—and players are finding that the benefits in efficiency, pricing and scale are too good to pass up.

Talk to YieldX to learn more about how to take part in the electronic revolution with e-trading and algorithmic trading.


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