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Technology and Market Structure
BY Michael Chin, Broadway

Where is Electronification in Fixed Income Trading Headed?

After years of relative stagnancy, fixed income trading has gone through something of a renaissance of late.
Fixed income trading went through something of a renaissance in 2021 after years of relative stagnancy, with electronification coming quickly to the market. Dodd-Frank created a gap in the market, which in turn led to new trading platforms and protocols to foster liquidity. Asset managers gained more control over where and how their bond orders were filled - and banks, eager to revive bond trading volumes that had flagged after the vast reduction of inventories, jumped on board with these new platforms and protocols. The resulting investment in technologies let banks tap into their liquidity, modernize their trading workflows and realize a jump in revenues.
At the same time, virtual trading environments continued and required shifts in how liquidity was sourced for asset managers, how traders interacted with their colleagues and how the banks themselves interacted with clients. As a result, banks realized how critical their workflows are to connect risk, sales and trading functions so they can focus on optimal pricing, response times, execution quality and innovation.
We are now nearing the end of the latest major phase of fixed income electronification – where standard or non-complex workflows, strategies and types of trades, accounting for most of the market activity, were automated – and entering the next stage of development.
This new stage of electronification will tackle some of more complex instruments and trading strategies. But more importantly and prominently, it will go a few layers deeper, creating an even more open ecosystem – both within and across institutions, as well as various data/service providers – that ultimately opens new pathways to volume and revenue growth.

Why interoperability is the next logical step for trading workflows

Recent growth in the profitability and performance of bond trading has been supported by an affluence of new protocols, data sources, applications and tools. Yet where innovation has been plentiful, interoperability has been lacking. It’s been largely left to institutions to string these various pieces together as part of their trading workflows – and the work behind this hasn’t been the simplest, nor the most fluid.
Institutions want to change this. They want to integrate tools and data – both internal and third-party – more directly into their trading workflows, drawing upon the intelligence locked within this raw material to improve the quality of their execution and decision-making, all in the blink of an eye. They also are pushing their own developers as well as the providers they work with to build with interoperability in mind, emphasizing open frameworks.
Historically, institutions and service providers have eschewed open frameworks to either protect IP or ensure stickiness. That mentality is shifting, as both parties recognize the value of utilizing existing software or data where trading activity is commoditized and enabling the use of bespoke, specialized or preferred applications for trades where IP creates a competitive edge.
As part of this next phase of electronification, open technology, code and APIs will lay the groundwork for innovation. Openness gives many types of institutions the flexibility to shape their own workflows and business rules, on top of an ecosystem of interconnected products and solutions – again, both internal and external. This interconnectivity is especially important given that an increasing amount of bond liquidity is sitting on third-party platforms. For banks, increasing bond trading volumes will mean ensuring that buy-side orders can be filled as quickly as possible, in a way that’s competitively priced – and it would be unnecessarily challenging for these firms to do that without access to liquidity elsewhere.
In short, open frameworks will give bond trading workflows much more power and potency, with far less effort.

Empowering users with low code/no code

The state of trading workflows exemplifies the bond desk’s mentality towards technology: an expectation on third parties to do more of the technical work, but a strong desire to maintain some faculty over how the workflow reflects their own original ideas.
In the past, this would have involved some customization of an otherwise standard product – a modest compromise, but not necessarily optimal. Today, the advent of no-code/low-code capabilities within trading software is bringing traders and developers closer to the goal.
In essence, low-code/no-code empowers the trading desks themselves to customize workflows with their desired attributes. It also enables developers to do a lot more of the heavy lifting of programming – with ease – that would have otherwise required the assistance of the technology provider, or perhaps even a need to wait for a new capability to be developed.
And this is where the real empowerment comes in. With low-code/no-code, innovation can happen in a fraction of the time. Developers and trading desks can implement changes in rapid fashion, enabling them to bring new ideas and strategies to market faster. This flexibility and power will ultimately bring a new dynamism to bond trading workflows and accelerate the pace of innovation.

In a vibrant trading ecosystem, there are more winners

Before electronification, bond trading felt more of a cutthroat or zero-sum business. If a bank desk wasn’t dominating, they were losing. But electronic trading redefined the landscape. The nature of liquidity changed, and the importance of relationships gave way to an emphasis on service and quality execution.
New platforms and protocols might have initially posed a threat to the dominance of bank bond desks. But now, they serve as a means for institutions to continue to serve their long-standing buy-side clientele. They are tools for liquidity, and they’ve ultimately helped increase volumes and revenue.
Going forward, electronification will give banks even greater flexibility and control – while relinquishing a lot of strain or struggle that was once required to innovate in a market where every player was walled off. Interoperability between systems will unlock data in a way that fuels workflows and innovation. Open technology, code and APIs will drive innovation during the next phase of market structure evolution. Openness gives institutions the flexibility to shape their own workflows and business rules, on top of an ecosystem of interconnected products and solutions.
The next stage of electronification stands to make fixed income trading smarter, not just faster, simpler or more cost-effective. It will tackle some of the more complex instruments and trading strategies and create an even more open ecosystem that ultimately creates new pathways to volume and revenue growth. And ultimately, it will be those frameworks and trading solutions that augment -rather than replace - human traders that will give trading workflows much more power and potency, all with reduced effort.