Fixed Income Trading Protocols: Going with the Flow.

Clayton said the fixed income committee would be modeled after the Equity Market Structure Committee (EMSAC), and would be comprised of a diverse group of outside experts. 

“The time is right for the SEC to broaden its review of market structure to include specifically the efficiency, transparency, and effectiveness of our fixed income markets,” stated Clayton in prepared remarks made to the Economic Club of New York.

Ivy Schmerken

As the SEC turns to examine market structure issues in the bond markets, it comes at a time when there has been a flurry of new electronic trading venues entering with a range of protocols. In July, Frankfurt’s Deutsche Börse Group invested $10 million into Trumid, an all-to-all electronic trading startup that aims to allow asset managers and brokers to trade corporate bonds directly and anonymously with one another. Meanwhile, Open Door Trading LLC went live in April with a platform utilizing auctions for matching buyers and sellers of off-the-run US Treasury bonds.

Despite the perception that fixed income is an opaque, old-fashioned and slow moving marketplace, there’s been a lot of change over the past five years in the way that buy-side traders interact with brokers.

That point was emphasized in a recent webinar hosted by Greenwich Associates titled Fixed-Income Algorithmic Trading: Present and Future.

While US equities are viewed as the fastest and most electronic market, 46% of trading on a commission weighted-basis is actually still passed over the phone from the buy to the sell side, noted Kevin McPartland, Managing Director and Head of Market Structure and Technology, at Greenwich Associates during the webinar.

In comparison 37% of global fixed income is traded electronically on a volume-weighted basis, estimated McPartland. What is surprising is that the fixed income percent is really not that far away from equities, said McPartland.

In certain fixed-income markets, such as Treasuries and futures, trading is highly automated. About 50% of the US Treasuries market is traded electronically. The swaps market is also increasingly electronic due to the Dodd-Frank Act, which pushed activity onto swap execution facilities (SEFs), but algos are just starting to penetrate swaps, said McPartland.

The boom in fixed income ETFs can also not be ignored.  Since ETFs are traded like equities on exchanges, bond ETFs can be traded algorithmically.

A Mix of Trading Protocols

In the past, it was dealers speaking with dealers via phone; but now the market is bifurcated into two camps, wholesale vs. institutional. Thus, the choice of fixed income e-trading protocols hinges on the participant’s investment strategies and the style of the dealers to provide electronic, or more accurately, “electronified” brokerage services, said McPartland.

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