Bond Trading Approaches ‘Rapid Evolution’

Terry Flanagan

The fixed income market may never be as electronic as the equity market, but bonds are headed in that direction thanks partly to Dodd-Frank and technological advances.

“When technology is linked to regulatory fiat, expect if not a revolutionary change, at least an evolutionary change in a rapid way,” said Tom Joyce, chief executive of Knight Capital.

Speaking Tuesday morning at Markets Media’s Future of Electronic Fixed Income Trading conference in New York, Joyce said while the precise course of the bond market’s ‘electronification’ is unknown, the landscape of traders, trade handlers and routers, and technology providers will look different in five years. “We’re not going backwards,”Joyce said.

Joyce noted that foreign exchange is positioned between equities and bonds, and as such the trajectory of the FX market structure can provide a good blueprint for how bond trading will evolve. Algorithmic and high-speed trading are making inroads in FX and could be headed for the bond market as well, he said.

One recent development that holds implications for bond trading is a regulatory focus on fixed income sales practices. “This could redefine best execution in fixed income”, said Joyce, pulling in more equity-like and quantitative metrics than the “fair” and “reasonable” descriptors that are still used in bonds.

“Do not underestimate the regulators” and their potential influence on this area, Joyce said. Already, more bond traders and investors are evaluating speed, price and fill rates, he added.

Given the breadth of the bond market and illiquidity of a large percentage of its securities, bond trading isn’t likely to ever be all low-touch. “We will always need traders with deep market knowledge and salespeople with strong relationships,” Joyce said.

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