The fixed income markets have seen more significant transformations in the past few years than in the previous cumulative decade. In this article, Colby Jenkins, Strategic Advisor at Aite-Novarica Group, breaks down the potential role fixed income execution management systems (FI EMS) may play within this new fixed income market structure.
This week’s announcement that Trading Technologies (TT) has acquired London-based fixed income EMS solution provider AxeTrading should come as no surprise to observers of the slow but steady tide shift of consolidation and modernization within certain corners of the fixed income marketplace in recent years.
In the course of interviewing providers for a recently published Aite-Novarica Group report, the first in a series examining the fixed income EMS landscape, it became quickly apparent that expanded cross-asset and automated trading support were viewed as paramount functionalities to expand upon in the coming year and a half. Enhancements around portfolio trading and data/analytics capabilities were the next most cited areas of focus but nonetheless speak to the wider market appetite for data-intensive trading innovations.
Taking a step back, the fixed income marketplace certainly experienced a significant transformation with respect to electronic trading adoption in the immediate years following the Covid pandemic. The question is whether this has been a fleeting or lasting change. Recent market indicators, for U.S. Credit in particular, would suggest that the market has indeed finally taken that next step forward in e-trading sophistication. Despite significant headwinds facing the credit markets in recent quarters (whether periods of high or low volatility or deep or thin liquidity) investment grade corporate bond electronic trading levels have remained stable at around 40% of the total market (give or take a handful of percentage points).
This new e-trading baseline, if you will, is a bellwether for the new data foundation upon which the ever-growing stable of fixed income trading solutions are being built. In other words, a consequence of traders embracing electronic workflows and modes of execution at scale is an entirely new universe of market data. And this data is growing faster than most buy-side firms can gain the sophistication required to utilize it.
The modern fixed income data ecosystem is now sufficient to inform modern algorithmic trade models, composite pricing engines, and liquidity analytics—tools that were once the domain of equities markets alone. This has afforded technology providers significant opportunities in recent years to capitalize on this rapidly evolving market structure, and many have done so successfully.
Fixed Income EMS providers (whether legacy equity EMS providers that have built out FI-trading functionality or pure fixed income connectivity systems) certainly think so. Based on conversations with over a dozen EMS providers over the past half of the year, the unequivocal expectation is that market sentiment is quietly approaching the point at which FI-specialized EMS are no longer a nice to have solution but an essential tool for navigating an increasingly fragmented, inefficient-at-best marketplace.
The 30,000-foot view is that these must-haves underscore a more fundamental trend shaping the fixed income markets today (in particular within the U.S. Credit markets) wherein the traditional lines of demarcation between pre-, at, and post-trade workflows begin to blur for the most liquid and standardized trades (the lowest hanging fruit in terms of electronification/automation).
The big question going forward is to what extent (if at all) these efficiency solutions can be applied to the larger, more complicated portion of trades that are still very much the purview of major dealers, which, after all still represent the vast majority of trading through what can be described as ‘traditional’ workflows and are (in lieu of a significant upheaval of current market structure) an indispensable variable within the fixed income liquidity equation.
