May 2022
Electronic bond trading accelerates across the Asia-Pacific
Electronic bond trading is accelerating in Asia, spurred on by COVID and the benefits of buy-side anonymity. Data and independent pricing can provide substantial business benefits.
Electronic bond trading in Asia has accelerated during COVID, with the benefit of buy-side anonymity driving the use of electronic venues.
But it is concentrated in segments such as sovereign and investment grade bonds, while large trades and high yield fixed income instruments remain reliant on traditional trading methods.
The shift towards e-trading has made independent pricing for pre and post trades more important for both compliance purposes and as a business benefit.
“There’s been a lot more electronic execution on smaller trades in Asia, particularly in pockets of the private banking space,” says Larry Rorrison, Director, Business Development-Fixed Income at ICE. “But in the larger institutional market, electronic trading depends on the types of security and size of the transaction.”
“Trades of five million dollars plus are still being done over the phone. There’s a level of negotiation needed around those bigger trades. Local currency and high yield transactions are unlikely to be done electronically either. And there are some institutional traders who are more old school,” Rorrison says.
“But particularly in investment grade securities, e-trading is expanding in the region.”
Cultural norms vs changing technology
ICE’s clients include buy-side and sell-side firms across Hong Kong, Taiwan, Singapore, Australia and Japan. The company says its clients point to execution efficiency as the key benefit of electronic trading, followed by liquidity and price transparency, then speed of execution.
A recent study by research group Coalition Greenwich1 found that 37 per cent of domestic currency bonds traded electronically in the past year. It pointed out that trading desks, with the right market access, platform technology and data, are now generating alpha, as they beat execution expectations.
The Greenwich Coalition study says Asia is less advanced along the electronic bond path than Europe and the US, reflecting market norms grounded in local culture and traditional relationships, as well as diverse regulatory regimes.
“Changing cultural norms is often harder than changing the technology itself,” the report says. “Relationships are still critical when trading bonds, and so fears that e-trading will disrupt those long-held partnerships leave many in Asia nervous.”
Rorrison agrees but says the region is shifting.
“Electronic trading gives asset managers the ability to use protocols like click-to-trade if they’re looking at investment grade credit. So, if there are Chinese investment grade dollar bonds, the asset manager can go in and see the size and price, and trade,” Rorrison says.
“On the buy-side what’s important is anonymity around trading, because the Asian market is relatively small compared to Europe and America from a liquidity standpoint.
“If a sell side market maker is aware that there is a buy side [counterparty] shopping around in high yield paper, they have the ability to move the price. But online electronic venues allow anonymous RFQ [request for quote] to be sent, boosting anonymity,” Rorrison explains.
The anonymity allows a buy side counterpart to break up an order and trade across multiple platforms. It replaces the conversation with the trusted brokers, or brokers, and better prevents information leakage that can affect prices.
A sharp rise in algorithmic trading
On the sell-side of the trade, there is a true shift to electronification when transactions are investment grade, in USD, says Magnus Cattan, Head of ICE Data Services Asia-Pacific. And there’s also been a sharp rise in algorithmic trading particularly among banks.
“There’s been a build-up of capabilities to algo trade and that’s helped electronic trading in certain segments of the marketplace,” he says.
Rorrison says this push into algorithmic trading and electronic execution in Asia is a trend that’s accelerating, notwithstanding the region remains behind the US and Europe. What Asian traders increasingly need is information to help with pre and post trade transparency. That’s not as simple as it seems in an electronic world.
“I can ask for a quote and get three or four market makers to provide a price. I execute on the best price and that’s considered best execution” Rorrison says. “But there might be 20 market makers and they are not all on the same venues so there’s the potential for the independent RFQ pricing to be questioned.”
An option is to find a price that’s independently determined. ICE itself can provide independent, intraday evaluated pricing on about 2.8 million securities.
“The value of independent pricing is becoming more important in both the pre-trade and post trade,” Rorrison says.
Cattan says over time, independent pricing allows a buy-side investor to observe how different counterparties operate and price, and there can be a business benefit in understanding where more favourable pricing is likely to come from.
“It helps a trader understand where they should be directing some of their business, and then they can use data to break it down further,” Cattan says. “For example, for a certain industry I might get much better pricing from counterparty A, and for a certain rating group I may get much better pricing from counterparty B. That can help inform better trading decisions… and Asian markets are yet to fully embrace that.”
Despite the fast growth of electronic bond trading, the complexity of fixed income means a variety of trading formats are likely to persist, Rorrison says.
“The complexity and the amount of information that is required to understand every single issuance is too high a mountain to climb from an electronic standpoint,” he says. “There will be continued evolution in electronic trading and growth in pockets of the market, but I don’t think it will ever capture all securities.”
1 https://www.greenwich.com/fixed-income/electronification-and-market-access-drive-alpha-asian-bond-markets