In Part 1 of this series, we discussed one of the problems in the way in which fixed income market participants consume information and how to overcome it.
In Part II, we will consider another large information problem, the trends for 2017 and the opportunities. So, what information problem are we talking about? Electronic trading platforms.
There are currently 128 existing electronic trading platforms for fixed income. While there are many barriers to entry in this space, the largest is not the technology issues but rather the need to establish a network. Although this bodes well for large market incumbents, at the same time however, it has not stopped new platforms from cropping up. In fact, 14 new platforms have come into existence just since November '16.
Within this context, what are the trends that may drive more trades and greater liquidity?
- Consolidation: Clearly all 128 platforms in fixed income are not likely to prove to be sustainable. We would look for more acquisitions such as the combination between TruMid & Electronifie, in orderto leverage existing networks and increase scale.
- Cross asset class: Market incumbents will continue to leverage their existing networks to provide more capability across asset classes. MarketAxess, the most highly successful operator to date in the corporate bond market, has recently launched in the Muni market.
- Increased trading protocols: For an existing operator, once a network is achieved, increased protocols will spur more trades on that network.
- Smart protocols: Look for players to increase data usage to intelligently route interests.
- Increased Openness: Increasingly trading platforms seem to be more amenable to the notion of allowing their data to flow into 3rd-party providers of software tools. This collaboration trend is a good thing for the market.
Despite these trends, however, there is an underlying issue that prevents better functioning: Information is too fragmented. It’s just not feasible to access liquidity efficiently with 128 protocols in the market. In fact, many participants have taken a wait and see approach to adopting more than the top X platforms.
Let’s take a look at a quick reason why: On any given platform, if an offer that I may care about exists for, say, 10 minutes but I am not looking at the platform during that time span, I’ve effectively not had access to that liquidity. This also helps explain why few, if any, market participants enable all the transactions platforms that are available to them: There simply is no way to monitor all platforms at all times.
How might you, as a sophisticated player in the market, take advantage of this situation? Well, while you can't hasten the pace of all these trends, the key is to leverage the increased openness of platforms. But how?
Stay tuned for Part III.