Banks Must Adapt to the Growth of Fixed Income Electronic Trading to Retain Customer Flow

London - 22 May 2013

  • Banks must become niche providers of bonds and interest rates derivatives liquidity if they are to adapt for the future
  • ​GreySpark’s maturity model helps banks prepare for challenging changes to market structure

A new piece of research from GreySpark Partners, a London-based capital markets consultancy, published today examines the state of electronic trading in fixed income markets for bonds, CDS and IRS. The report, Fixed Income Electronic Trading 2013, analyses how the traditional roles of investment banks and trading venues for these products are changing. This is driven by a combination of macroeconomic forces and incoming capital markets regulations, bringing to an end the practice of debt warehousing by market-making dealers.

The global financial crisis has caused liquidity in the fixed income market to stall and fragment across a number of trading venues. New capital markets regulations are changing the fixed income market’s structure, forcing established trading venue operators to prepare for changes that will incentivise the emergence of new competitors. The GreySpark report finds that leading banks must adapt to this changing landscape by differentiating themselves from competitors and become specialist providers of liquidity in the fixed income markets. In order to achieve this, enhancements to their existing sales and trading tools that emphasise cost-effective access to bonds liquidity and IRD liquidity as well as enhancements to various areas of post-trade functionality, must be made.

Achieving specialist status as a fixed income liquidity provider means banks must first understand how they are positioned in the market. To aid in this effort, the GreySpark report creates a business and technology maturity model that banks can use to prepare for changes to the market structure for bonds and IRD dealing. This GreySpark maturity model can be used to assess the adaptability of a bank’s fixed income dealing business and drive decisions in the development or adaption of technology solutions that will allow that business to grow in an increasingly competitive future landscape.

Frederic Ponzo, GreySpark managing partner and lead author of the report, said: “The rules of the game governing fixed income markets are changing drastically. As a result, banks must decide soon how to build or rebuild a competitive advantage in fixed income e-trading.”

Russell Dinnage, GreySpark analyst consultant and report co-author, added: “The impact of incoming capital markets regulations in the EU and US on the market structure for fixed income products like bonds and IRS could be significant. Market participants are expecting more electronification of trading in these asset classes, and signs of the technological tipping points are growing more pertinent every year.”

The maturity model for future adaptability in fixed income e-trading was developed by GreySpark consultants based on hands-on experience in eight leading investment banks in the fixed income space looking at business models and trading technology capabilities.

The Fixed Income Electronic Trading 2013 report is one of four reports GreySpark are set to publish in 2013 that build on the success of the Trends in E-Commerce and Electronic Trading annual report. GreySpark will next publish a report examining future changes to the market structure for FX trading followed by Trends in E-Commerce 2013 and, finally, a report on the current state of play in equities e-trading, all of which are set for release later this year.

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