By Bruce Boytim, COO, Broadway Technology
As digitization and automation become more commonplace amongst traders, there’s a lot of talk about the rise of electronification within the fixed income market. And while it’s true that electronification in fixed income is on the rise, there will never be – at least not in our lifetime – a fully automated fixed income trading market. Quite simply, the deals are too complex, too large, and at times, too illiquid to be managed by even the most intelligent trading software.
Fixed income is a unique beast, and as such, it will always require at least some element of human-to-human interaction. New technologies and new workflows are continuously being developed, and there is absolutely room for further automation within this market. However, unlike other asset classes, new technologies being developed for fixed income trading must be done in way that supports, rather than replaces, the human-to-human interactions which make this asset class so unique.
Keeping up with the times
Fixed income has traditionally been overwhelmingly manual, but this has recently started to change. Over the past several years, increasingly digital environments, changing industry regulations, electronification, and the proliferation of new trading venues have all been massive drivers of change – and fixed income traders have been forced to adapt and embrace automation to stay relevant.
Then the COVID-19 pandemic hit, which further accelerated digital adoption. With offices closed and traders working in a virtual environment, they lost that human-to-human contact which is so prevalent in fixed income trading. This change forced many people to trade electronically for the first time; evidenced by a significant increase in electronic trading volumes over the past two years. And now that traders have become accustomed to electronic trading, it’s unlikely they’ll go back. The fixed income market has finally reached the digital age and can only move forward from here.
Navigating a complex landscape
Despite the advancements in technology, there isn’t a single algorithm or automated workflow which has the capacity to understand the intricate and highly complex bonds market. For a start – the market is too big. In the US, the equities market has around 41,000 different instruments or securities, while in the fixed income market there are millions of different instruments. It’s also worth noting corporate bonds might only trade once a week – in fact, of the 22,000 corporate bonds listed in the United States, there are 250 that only trade once a day. This results in a dichotomy of very liquid and illiquid markets to contend with.
The other thing that makes fixed income so different to equities is that the average size of a bond trade is around 100 times greater than an equity trade. Further, fixed income markets require a lot more analytics to help drive pricing, as traders have proprietary ways of pricing and analyzing bonds. Add to this the fact that there are more trading venues now emerging, causing a lot more fragmentation within the market, and you end up with a market where multiple different elements are drive price. It’s the combination of all these layers and navigating all this complexity, that will see humans remain a crucial element in getting bonds trades over the line.
A marriage of digital and analogue
The fixed income market will become increasingly automated – this is an inevitable, and welcome, progression. However, for new technologies to truly enhanced fixed income trading, they must be designed in a way that supports the unique and highly complex nature of the market. Platforms need to be able to marry both human workflows and automated workflows, and they must enable the integration of third parties and other vendors that form part of the overarching trade ecosystem.
Traders each have their unique ways of working – they have their own analytics, their own special algorithms and their own way to approach pricing. It’s what sets them apart, it’s their secret sauce. It’s crucial that traders can hold on to the things which differentiate them from the pack, while still being able to integrate workflow tools that embrace automation.
On the cusp of change
Right now, we’re in the very early days of transformation. And for some businesses, it might feel like the pressure to invest in new technologies, new trading venues, and infrastructure that supports virtual environments, is making life more complicated, rather than easier. But it will get better. As traders get used to new ways of working, as more complex workflows become automated, the fixed income market will become increasingly more efficient, with firms seeing increasingly more return on investment.
We will likely never see a time when AI and machine learning take over the need for human-to-human interaction in fixed income trading, but we can absolutely use these technologies to make bonds trading easier. If the new solutions embrace different workstyles and enhance unique workflows, the future of fixed income trading will only continue to improve.