Fixed Income Trading Evolves?

Terry Flanagan

Equities traders witnessed a transition from floor to computers, but will bond traders endure the same changes.?

Today’s story of the markets has evolved so far from Wall Street’s origins that quintessential characters, such as the New York Stock Exchange, are considered to a symbol of the obsolete. Traders today are skilled computer scientists—just as knowledgeable about building algorithms, as they are about the instruments they trade. Algorithms are the primary mechanism for which liquid stocks trade in today’s global markets.

What about trading evolution in the bond market? The fixed income universe, which spans the wide-spectrum of bonds, interest rates, credit products, mortgages, loans and other structured products, is more than $80 trillion worth of assets worldwide, which is significantly more than then equities.

An emphasis on tracking and listing bond trading has only grown in recent years, given events like the financial crisis of 2008 and 2009 resulted in regulators and investors pushing for an increase in transparency. Transparency has also become a key issue for bond traders considering most of the trades that exchange hands are worth significantly more than the average equity trade—with the exception of perhaps an institutional buy side’s block trade.

In 2007, the NYSE launched its first bonds trading system platform. Since then, the platform has become the largest centralized corporate bond market in the U.S., aimed at providing an opportunity for participants to trade bonds in an open environment. However, less than 15% of the overall bond market is traded electronically today.

Despite the initiative to achieve greater industry transparency, participants still feel the necessity of “voice”—or human brokers to help pass through trades.

“There will always be a place for voice,” said Bill McCauley, principal and chief executive of III Offshore Advisors, a nearly $1.3 billion relative value hedge fund based in Boca Raton, Florida. “There are some systems that use various forms of artificial intelligence, and algos, but they never operate without human oversight.”

McCauley is among the bond market participants that don’t feel the evolution of bond trading will be analogous to high frequency trading, now accounting for more than 70% of equity trading in the U.S.

“Most of the rates strategies still require human contact because they involve discretion and negotiation…the computer platforms just facilitate doing the trade,” he told Markets Media.

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