The U.S. mortgage-backed securities (MBS) market is on the verge of an electronification boom similar to the one that has transformed the trading of corporate bonds, U.S. Treasuries and other fixed-income products.

MBS products represent almost a quarter of the average daily volume of U.S. fixed-income trading. This massive market has trailed other parts of the fixed-income universe in the transition to electronic trading. For example, the share of U.S. investment-grade corporate bonds traded electronically has increased to roughly 50% today from just a third in 2020. By contrast, most MBS market participants still execute more than three-quarters of trading volume in ABS, CMOs, CMBS and other mortgage products via phone or chat.

According to new research from Crisil Coalition Greenwich, the MBS market is poised for dramatic change. Buy-side market participants have spent the past several years automating internal workflows on trading desks and more than half of (Geo) participants in a recent study report their trading workflows are now at least somewhat automated. Going forward, the growing use of comprehensive order management systems (OMS) and other automation solutions will facilitate easier electronic trading. Meanwhile, trading venue technology has reached a milestone where e-trading solutions exist that can work for nearly all OTC products, regardless of their liquidity profile.

“We expect a jump in MBS electronification in the next few years motivated by the same forces that have driven the e-trading boom in other products—efficiency, enhanced transparency and evolving TRACE reporting requirements,” says Audrey Costabile, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Electronification is set to grow in MBS markets.

Transparency, Liquidity and Growth
Much of the trading business now conducted via phone or chat will migrate to electronic multi-dealer platforms (MDPs). Already, about 40% of buy-side firms are using MDPs to transact the majority of their CMO and CMBS orders.

TRACE reporting and enhanced data on MDPs will improve price transparency throughout the market. Automation and electronic execution will help speed the adoption of newer MBS products, such as ETFs.

“Expanding product options and improved transparency as a result of increased electronic execution will attract a bigger and more diverse universe of market participants, setting the stage for accelerated growth for the MBS market overall,” says Audrey Costabile.

Electronification is set to grow in MBS markets presents the complete results of a new study on MBS electronification, for which Crisil Coalition Greenwich interviewed U.S. based buy-side market participants in the fourth quarter of 2024. The report assesses the current state of electronic trading in MBS, examines ongoing automation efforts among market participants, analyzes the impact of technology improvements on MBS data and analytics, and projects future developments in MBS e-trading.

Source: Crisil Coalition Greenwich