Bond Market Tracks FX

Terry Flanagan

Fixed-income securities are increasingly traded electronically, but rather than following the  equity market as a blueprint, similarity to foreign exchange is seen as more appropriate.

“If we look at our market and how things can evolve much potentially differently, I can see fixed income looking more like FX than equities,” said Isaac Chang, global head of fixed income at market maker Getco LLC. “In FX, people who have been successful in the market have been able to leverage technology to reach more users, in a market structure that is not as centralized as equities.”

Chang noted that the current U.S. equity market structure has been shaped largely by regulation, including Regulation National Market Structure, a sweeping framework enacted in 2007 that aimed to promote competition among trading venues and individual trade orders.

“You have a little of that in U.S. fixed income – (for example) capital requirements for dealers, the Volcker Rule, and Dodd-Frank — but nothing is really as revolutionary or ground-changing as Reg NMS,” said Chang, who will be a featured speaker at Markets Media’s Fixed Income Trading and Investing Summit in New York on May 14.

Within fixed-income market structure, the areas seeing the most change are credit, OTC swap, and Treasuries, according to Chang. One limitation in the bond market’s evolution toward electronic trading is its comparative non-standardization, plus the sheer number of thinly traded issues. There are workarounds, according to Chang.

“For less liquid issues, the market will figure out solutions; the same can be said today for some parts of equities and FX,” Chang told Markets Media. “It will be less cookie-cutter than it is for equities. I do believe the vast majority of fixed income can be electronically traded.”

The rate of change in the fixed-income market has been incremental and marginal. “The situation has not changed radically,” over the past year, Chang said.

But the end result can be viewed as inevitable given the backdrop of the times. “In my view the story of ‘electronification’ is one driven more by broad societal change rather than something specific to fixed income,” Chang said.

“In New York City you can order groceries through FreshDirect, make a restaurant reservation through OpenTable, and order take-out from Seamless,” he continued. “So the idea that you need to call someone to buy a bond seems a little out of place given what’s going on with the world at large.”

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