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You may have noticed that we are above-average interested in the evolution of the bond market around here, as trading gradually migrates from phones to screens and subtly alters its nature in the process.
Barclays’ analysts have also been very consistently good on the subject, especially Zornitsa Todorova, the bank’s head of “thematic FICC research” — a title which basically seems to be an excuse to do cool shit like this:
The digitisation of the bond market over the past two decades has been an extremely important development, and yet, data availability issues make tracking this evolution a considerable challenge, particularly for the European market. The way we try to address this issue in this report is by creating our own proxy of the forthcoming European bond consolidated tape.
This tape is a transaction-level dataset assembled using MiFiDII post-trade reporting records over the period from February 2023 to March 2024, containing more than 9mn trades and over €23trn of total volumes across both credit and rates products. We then combined this European repository with data for the US market to paint a holistic picture of the global electronic bond market.
That’s from a new Barclays report on electronic bond trading by Todorova and Andrea Diaz Lafuente. The diligent data work is a delight, but the headline findings won’t surprise anyone who has been following the subject.
Government bond trading is already highly digital, roughly half of investment grade corporate bonds trade electronically, and high-yield and convertibles are slowly getting there.
There are lots of interesting stats in the report that hammer the point home, such as how it isn’t just smaller bond trades that are done electronically any more:
. . . Computer algorithms now regularly price block trade inquiries (above €5mn in IG and above €1mn in HY). In fact, we estimate that in 2017 just 4% of the block trade inquiries in credit had at least one algo response, compared to 62% in 2023.
And that algo-to-algo trading is becoming more of a thing:
The use of the so-called automatic execution (auto-x), where investors carry out trades based on a predefined set of criteria (eg. price limits or number of responses), has taken the market by storm. In 2019, less than 23% of trades in US Treasuries used the auto-x functionality. By 2024, this figure has nearly tripled, with close to 62% of inquiries using auto-x.
Todorova and Lafuente reckon that traditional phone-based trading and electronic trading are “strategic complements” — in other words, the former isn’t merely cannibalising the latter. When markets are a bit pukey, having both is particularly important, they argue.
But the main point of the report — titled The human touch: why the bond market will continue to have a voice — is that there is probably a limit to how far electronification can go.
For example, while government bond trading is years ahead of corporate bonds on what Barclays poetically calls its “electronic journey”, a large minority of even algo-friendly smaller trades still happens by phone.
In fact, across the board it has hovered around 70 per cent for several years, because of what Todorova and Lafuente dub the “three C’s” — many trades still require banks to commit Capital; the heterogeneity of bond markets means that many trades need to be Customised; and there’s an entrenched Community of bond trading relationships that is particularly important when markets are chaotic.
This means that even with more adoption and better tech there is probably a limit to how far things can go:
. . . There is a limit to how much the market can ultimately grow, and based on our analysis, we see 80% as the maximum threshold. This capacity will vary across asset classes and trade types, depending on how important the “three Cs” of voice trading are. Each approach has unique strengths and roles to play in financial markets — electronic trading offers scale, speed and efficiency, but voice brings the human touch and allows for the handling of complex transactions.
The co-existence of voice and electronic trading will play a pivotal role in shaping a flexible and resilient bond market ecosystem, and allow investors to navigate different market conditions. For all the electronic evolution, we think bond market trading will probably never quite look like equities.
This is a bit of a truism. Of course bond markets will never look exactly like equities, for a multitude of reasons. And even in equities, phones still play an important role in larger, more complex trades.
But both the speed and extent of the shift towards electronic trading has consistently surprised people for decades. It’s hard to say it will stop surprising people now.