New requirements set to 'reshape how we think about bond trading'
by Alice Atkins
Wall Street’s biggest banks expect changes to the quality and availability of European bond market data will unlock the next wave of electronic trading growth.
Officials at JPMorgan Chase & Co, Bank of America Corp. and Morgan Stanley say that new rules requiring more detailed bond trade reporting, and the development of a data pool that tracks real-time market activity, will boost transparency and improve computer-driven trading models.
This will “help reshape how we think about bond trading,” said Ruchi Gawri, head of European rates eSales, product and market structure at Morgan Stanley. “It’s going to be one of the big drivers of electronic trading growth.”
Revised standards for post-trade bond reporting come into effect on Dec. 1 for the UK and March 2 for the European Union. The launch of two so-called consolidated bond tapes — one for the UK and one for the EU — are then set to follow.
The bank representatives spoke at an annual fixed income industry gathering in Amsterdam.
Bank of America estimates that real-time transparency for corporate bonds by trade count will increase to 84% and 88% in the UK and EU respectively, from 3% and 23% today. For sovereign bonds, it will increase to 75% and 96% in the UK and EU, up from 37% and 83%.
“Data can be a precursor to further electronification,” said Kate Finlayson, global head of FICC market structure and liquidity strategy at JPMorgan. “It helps with the development of trading models and algorithms. On a post-trade basis, it’s also needed to determine how the algos performed.”
European bond markets have been slower to adopt some algorithmic strategies than the US, where bond trading data has long been amalgamated through TRACE.
“We have seen a lot of innovation but sometimes it feels, particularly in fixed income, like you’re wading through treacle,” said Gareth Coltman, head of trading product EMEA and APAC at MarketAxess. “Getting that data right is crucial.”
While better bond data will drive efficiency, it may also eat into banks’ margins. The introduction of TRACE in the US narrowed bid-ask spreads and reduced annual trading costs for investors by nearly $1 billion.
‘Too Far’
Some on the buyside are also wary of the consequences of a smaller role for human traders. Automation is leaving trading desks understaffed, according to Karim Awenat, head of EMEA & APAC Macro Trading at Invesco.
“There’s efficiencies and room to stop sloppy errors but frankly, it’s been used as a stick to beat traders to do more volume with less,” he said. “Automation and electronification has gone too far.”
Still, it may be some time before the aggregated bond data sets are ready for use. The UK’s bond tape is being delayed by a legal challenge to the FCA’s selection process, while the EU’s initiative is awaiting authorization and is yet to announce a launch date.
Fixed income market structure has changed dramatically in recent years through the rise of exchange-traded funds, portfolio trading and the growth of non-bank liquidity providers. But the absence of a centralized exchange and a predominately request-for-quote set up means voice trading continues to play a big role.
David Camara Iniesta, head of EMEA FICC e-trading and market structure at Bank of America, expects the development of consolidated bond tapes in the region will be a much-needed catalyst.
“Clean data will be the big change,” he said. “Especially with AI, we will no longer have to write code to pick data from the system.”
Copyright Bloomberg News
