What are the main themes driving the uptake of electronic trading platforms?
The key areas of focus for buy-side customers now are their search for liquidity, pursuit of efficiency and preparation for a new cleared world. These themes have been the main drivers of the acceleration in demand for e-trading in fixed income and derivatives markets in the US and Europe. This trend has been evident in those regions for some time — and we expect this to continue into Asia. A good example is the European government bond market, where approximately 50% of trade volume executed in the dealer-to-customer space is already traded electronically. If you think about the size of this market and how recently an electronic trading platform was first introduced, the growth rate is astonishing.
Why has the growth been so fast?
Perhaps the most important reason for this growth is that electronic platforms bring fundamental operational benefits to all market participants, while at the same time maintaining the relationships between investors and their dealers.
Those investment companies already trading electronically — such as asset managers and pension funds — are reaping significant benefits from facilitated access to liquidity, greater price discovery and from post-trade processing and reporting, which provides audit trails and assists clients in proving best execution.
Electronic marketplaces can be fully integrated into existing systems on both the buy side and the sell side. In Europe, for instance, more than 60% of trades executed on Tradeweb are delivered to an order management system, significantly improving the speed and efficiency of post-trade processing. Electronic platforms can also be directly connected to clearing houses, allowing end users to fully automate their workflow without disruption, from trade execution through to clearing, further reducing operational risk.
How will the industry be affected as a greater number of derivatives and other products are cleared?
Global regulators are intent on injecting greater transparency into the derivatives market. However, in many jurisdictions uncertainty remains on the precise shape of the new rules on trade execution, clearing and reporting. Yet for an increasing number of institutional investors, part of the process of adapting to this changing landscape means moving the execution of their trading activities onto electronic platforms.
Rule makers are of course attracted to many of the operational benefits already mentioned — notably reducing operational risk and improving price transparency. Many regulators realise that e-trading is very much aligned with their efforts to increase transparency in the marketplace and to reduce systemic risk.
While in the US and Europe regulators are seeking to ensure that relevant standardised derivatives trades are centrally cleared by recognised clearing houses and that trading is executed on regulated venues, other jurisdictions may take a different approach. The Monetary Authority of Singapore, for example, is not currently proposing to mandate electronic trading. However, the ability for trading platforms to connect directly to clearing houses, so that the details of all client-cleared trades can be electronically submitted to the client’s choice of clearing house in real time, provides another compelling reason for electronic execution.
Tradeweb was a pioneer in multi-dealer platforms. How do they work?
The buy-side trader sends a request-for-quote to a chosen number of dealers simultaneously, each of which is listed in the pool of market makers providing liquidity to the platform. The great advantage of this auction process is that traders put dealers into competition to offer the best price.
Because the entire process is electronic, investment managers can track the performance of each auction and produce customised reports to help demonstrate evidence of best execution.
What do buy-side traders themselves stand to gain from using an electronic platform, as opposed to calling up their dealers directly in the traditional voice market?
Electronic trading offers numerous advantages to traders. Because the trader receives all the prices back at one time on one screen, this eliminates the need to make numerous phone calls to find the best prices, while in volatile markets it also reduces the chance that a dealer’s price may change due to market moves.
Traders also like the efficiency of the workflow, for instance when allocating a trade to different sub-accounts sitting behind a transaction. Electronic trading platforms can automate all of this, saving traders valuable time. Importantly, during this process, existing trading relationships and information flow are fully preserved. Traders on both sides of electronically executed trades are still dealing with the same people that they would be using other methods.
Additionally, automatically stored post-trade data from previous auctions allows traders to analyse their counterparties’ quoting performance, which may help them choose dealers when next sending out a request for quote.
Can we expect to see a similar growth trend in Asia to that in Europe and the US?
As global market participants adapt to market reforms, electronic trading looks certain to have an increasingly large role to play. Although proposals are starting to take shape in Asia, a great deal of uncertainty remains. But for those institutional investors seeking improved operational reliability, efficiency, transparency (that does not undermine liquidity) and competitive pricing, electronic trading is well positioned to become an increasing part of the landscape.