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Technology Spending Key to Fixed-Income Market Share Growth

Traders Magazine Online News, October 11, 2017

John D'Antona Jr.

Technology is the key to driving the fixed-income brokers forward – pushing the sector from a manual opaque market into a powerhouse to rival other asset classes.

And that will push trading too, according to the latest report from market consultancy Greenwich Associates.

The top six U.S. government bond dealers have an aggregate annual technology budget of $26 billion. That astounding figure illustrates the extent to which technology prowess has become the key determinant of success or failure for banks competing in capital markets, reports Greenwich. In their new report, “The Technology to Succeed in Fixed-Income Trading,” they write that global and regional bond dealers that made the biggest IT investments over the past decade have also achieved the highest levels of market share growth.

Kevin McPartland, Greenwich Associates

Growth will come amid the current lingering low rate and low volatility environment which has hurt dealer profit margins, and brought a worldwide slowdown in trading activity has depressed volumes. As a result, fixed-income revenues have fallen while profitability per trade is shrinking. Yet even in this cost cutting environment, continued investment in fixed-income technology is key.

“While individual dealers have little control over the total market volume, technology investments that increase distribution while reducing costs represent a critical competitive advantage,” said Kevin McPartland, Head of Market Structure and Technology Research at Greenwich Associates, and author of the new report, which traces the impact of technology in fixed income, and analyzes how dealers are employing specific technologies in both client-facing functions and hedging.

The consultancy interviewed 173 fixed-income investors from Q3 2016 to Q2 2017, in addition to top-tier broker-dealers and liquidity providers, to better understand the role of technology in the dealer/client relationship in the United States. Conversations examined how the buy-side/sell-side relationship is evolving, the technology currently used by sell-side trading desks and expectations for the future.

McPartland added that the fact that smaller dealers cannot afford the same level of expenditure maintained by the largest banks does not preclude them from realizing these important benefits.

“Whereas real-time pricing and automatic hedging were, until recently, only available to those with big technology teams and budgets to build them in-house, third-party providers are now paving the way for a longer list of fixed-income dealers to up their game—and profitability,” McPartland said.

A strong technology platform will be even more important to success in the future, given the increasing competition from new nonbank liquidity providers whose value proposition rests largely on their use of cutting-edge technology. Today, one in five government bond investors and one in four interest-rate derivative investors either trade with or plans to gain access to nonbank liquidity providers, demonstrating the impact technology has had on the business.

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