Banks must become niche providers of bonds and interest rates derivatives liquidity if they are to adapt for the increasingly electronic future of fixed income e-trading, according to GreySpark Partners, a London-based capital markets consultancy.
In a GreySpark report entitled ‘Fixed Income Electronic Trading 2013’, the consultancy examines the state of electronic e-trading in the fixed income markets for bonds, credit default swaps (CDS) and interest rate swaps (IRS).
It analyses how the traditional roles of investment banks and trading venues for these products are changing, driven by a combination of macroeconomic forces and incoming capital markets regulations, such as Dodd Frank, MiFID II, EMIR and so forth, bringing to an end the practice of debt warehousing by market-making dealers.
GreySpark reports that 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 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.
Frederic Ponzo, GreySpark managing partner and the report’s lead author, 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 European Union (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.”