Vanguard, which manages assets worth over $ 3.6 trillion, in a report published on October 18 made a series of recommendations to help speed up the adoption of electronic trading in fixed income, including greater transparency and limiting the fragmentation of new venues.
The US manager said that “focusing trading on a limited number of electronic venues, or aggregating trade information, will help ensure that the diverse universe of buyers and sellers will converge and liquidity will be concentrated”.
It also added that continuous price-setting, “similar to that experienced in the move to electronic trading in equity markets, will undoubtedly encourage participation”.
The report comes as tougher post-crisis capital requirements have made it more expensive for banks to hold bonds on their books, shifting inventory to the buyside and encouraging the adoption of electronic trading. Several initiatives have been launched over the past few years to address the issue, from both startups to established operators such as Liquidnet.
Vanguard said the “movement toward electronic trading has resulted in the emergence of a more diverse set of market participants, increasing competition and providing new sources of liquidity”.
However, the firm added that platforms needed further development, in particular all-to-all networks – a small but growing channel of electronic trading that allows direct interaction between buyers and sellers of bonds, as well as dealers. Historically, trading has only happened between dealers, or between dealers and clients.
MarketAxess is among the operators that have seen success with an all-to-all platform, which it calls Open Trading: during the second quarter, clients traded $ 40.8 billion of fixed-income products through the system, up 91% from the previous year.
The Vanguard report said that “the overall market benefits when buyside firms more regularly participate directly as buyers and sellers”.
Another key development, in Vanguard’s view, is the need for all electronic platforms “to better integrate trading systems with buyside order-management systems in order to increase efficiencies and reduce search costs”, the report said.
An order-management system is software used by buyside firms that holds orders from their point of origination by portfolio managers. Some trading platforms, such as those run by Liquidnet, connect to these systems and sweep orders directly onto their platform, helping to automate the trading process. But while common on equity dealing desks, they are less so in fixed income.
Seth Merrin, Liquidnet’s CEO, said earlier this month: “I think it is fair to say that the buyside’s adoption of OMS on the fixed-income side is not as developed as in equities. There has never been a need for it before, but it is required for electronic trading to take hold further.”