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    The global fixed income market represents roughly $130 trillion in debt outstanding1, dwarfing the total market capitalisation for stocks. Over the past five years, fixed income markets have seen growth in electronic trading, however it has and will continue to evolve differently than electronic trading in equities due to the differing trading styles and the complexity of fixed income instruments.

    To understand the current state of the electronic evolution in fixed income, our Market Structure team fielded a Global Client Fixed Income Markets Structure Survey, receiving responses from institutions including central banks, asset managers, insurance companies and hedge funds. The results indicate that electronic trading in fixed income markets may be gaining traction at long last, driven in part by increased data availability and new regulations.

    “We've seen significant electronification, as well as adjustments in how firms trade fixed income securities over the last five years, but also observed a rapid acceleration over the last couple of years,” says Matthew Coupe, Director of Cross Asset Market Structure for the Global Markets business at Barclays. “As more firms migrate to electronic trading, the trend becomes self-perpetuating.”

    The survey covered over 50 questions in the following areas:

    1. Trading tools and protocols
    2. Execution solutions and strategy
    3. Best execution and trader performance analysis
    4. Dealer selection
    5. Regulatory change

    Here are four key takeaways from the survey.

    1. The notional value and volume of electronic trades is increasing

    While electronic trading in fixed income is not new, there are two typical assumptions about how it manifests in this market. First, that mostly just highly liquid standardised products are traded electronically, and second, that electronic trading volumes come from many tickets at relatively small notional values.

    In reality, use of electronic trading presents differently. The survey revealed that the gap between the number of tickets and notional value, for both rates and credits, is closing as investors execute larger trades electronically.

    Q: What proportion of your trading is executed electronically for Rates and Credit?
    Graphic representing survey respondents' answer to the question "What proportion of your trading is executed electronically for Rates and Credit?"

    Source:Barclays Global Client Fixed Income Markets Structure Survey

    The survey also indicates that electronic trading is not focused solely on the most liquid and generic products. For example, more clients indicate they are using electronic trading for emerging market currencies and interest rate swaps.

    2. Many investors are still wary of automation

    Trades executed with an order management system are categorised as electronic, but the implications of electronification are far reaching. For example, execution management systems (EMS) potentially automate the entire lifecycle of a trade, from pre-programmed trading to settlement. In our survey, however, over 60% of respondents indicated that they do not have an EMS, and less than half are looking to implement one by the end of 2021. What’s more, less than 25% of respondents’ flow is executed using automation.

    What's the hold up? Many investors, but particularly those in the Americas, indicated that they have experienced pricing fragmentation across different platforms for the same instrument.

    Q: Have you experienced pricing fragmentation across different platforms for the same instruments?
    Bar chart depicting survey respondents' answers to the question "Have you experienced pricing fragmentation across different platforms for the same instruments?"

    Source: Barclays Global Client Fixed Income Markets Structure Survey

    3. Firms are taking a more systematic approach to best execution

    Many variables affect the true cost of a fixed income transaction. To that end, best execution, a legal mandate to execute trades advantageously for clients, encompasses many factors beyond price, including the size of a trade, market impact, liquidity, speed and information leakage, among others. In the survey, more than half of respondents said they are using a transaction cost analysis (TCA) system to fulfill their regulatory responsibilities.

    That said, respondents found value in TCA systems beyond satisfying regulatory obligations. The most popular use case is to understand trading performance, but respondents also used their TCA solution for cost and pricing analysis and benchmarking, as well as to inform dealer or counterparty selection.

    Q: What are your core reasons for having a transaction cost analysis (TCA) system?
    Bar chart depicting responses to survey question "Q: What are your core reasons for having a transaction cost analysis (TCA) system?"

    Source: Barclays Global Client Fixed Income Markets Structure Survey

    4. Regulatory demands are likely to drive electronification

    When it comes to electronic trading, the evolving regulatory environment has been a double-edged sword. On the one hand, 69% of clients surveyed said regulatory change has delayed innovation.

    Q: Has the amount of regulatory change that firms have had to focus on in recent years delayed innovation and the development of more effective investment styles?
    Donut graph depicting respondents' answers to the question "Has the amount of regulatory change that firms have had to focus on in recent years delayed innovation and the development of more effective investment styles?"

    Source: Barclays Global Client Fixed Income Markets Structure Survey

    But at the same time, current and new regulations are catalysts for more data, analytics and transparency, suggesting that fixed income traders will continue to migrate to electronic trading. Our Market Structure team is tracking this evolving trend and its implications for fixed income markets.

    To obtain a full set of the results and to understand more, please contact your Barclays representative.

    1. Source: https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/Secondary-Markets/bond-market-size/

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    About the expert

    Matthew Coupe is Global Head of Cross Asset Market Structure for the Global Markets business at Barclays, based in London. He advises the Global Markets division on future market structure, forms the advocacy position of the division on areas of market structure, and engages with politicians, trade associations, regulatory bodies and clients to make sure this is articulated effectively, as well as assists in building Barclays' commercial response to these changes. Further to this, he develops explanatory and thought leadership pieces around Market Structure.

    Matthew co-chairs the Fix Trading Community for the EMEA region. A regulatory specialist, he is an expert in high-frequency trading and market surveillance in the post-MiFID landscape and their implications for trading desks and compliance departments.

    Matthew graduated from De Montfort University with a BA(Hons) in Business Studies, majoring in Financial Statistics.

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