Beyond 2021 – View on Liquidity


It has certainly been an eventful year with Covid-19 reverberating around the world, accelerating some trends and igniting others. Meanwhile, exchanges continue forging ahead, striking new deals and looking for growth opportunities. Despite the evolving backdrop, accessing liquidity remains a constant challenge in fixed income markets and participants are relying on an ever-wider array of tools to corral it in.

It is not surprising that during the height of the pandemic when markets were spiralling out of control last March and April that liquidity was even thinner. As in past disasters, traders picked up the phone and conducted business as spreads widened. The difference though with the global financial crisis, is this time around traders were working remotely which made human contact even that more important.

However, so too did technology. A combination of virtual offices, workflow efficiencies and a surge in new issuance pushed electronic volumes to new levels. The ensuing 13 years has seen traders become much more comfortable sending orders down electronic pipes especially at the more liquid, plain vanilla end of the market of government and sovereign bonds.

In fact, a report by Coalition Greenwich showed that electronically traded US Treasury bonds hit a record average daily volume of $540 billion in March 2020, 25% greater than the same period in 2019. The trend continued in 2021 across the fixed income spectrum with the consultancy noting the average daily volume for electronic trading had reached a new high of $10.6 billion in January significantly surpassing the previously set record of $10.3 billion reported last May.

There are not only many more execution venues to choose from since 2008 but also the range of protocols has expanded which has been beneficial to liquidity. The armoury today not only includes disclosed request for quote (RFQ) – which now accounts for nearly half of the volumes – but also anonymous RFQ as well as portfolio and all-to-all trading tools which have been steadily increasing over the past two years.

Electronification though is not just limited to the nuts and bolts of trading.  Other areas are also becoming more automated, including liquidity sourcing and aggregation, pricing, auto-quoting and automatically responding to RFQs. Firms are also adopting cloud based artificial intelligence tools to better match dealers with buyers.

Hand in hand is the growing menu of data aggregation tools which not only help firms navigate their way through the myriad of sources and platforms to find the right counterparty for a trade, but also enhance analytics, build credit curves and create more accurate bond pricing.

There is no doubt that innovation will continue a pace in fixed income, but it is unlikely that the asset class will emulate it equity counterparts which has fully embraced electronification. After all, there are many more instruments in bond markets, many of which trade only rarely. Also, a large proportion of trades, particularly in more complex or illiquid instruments, are negotiated bilaterally between counterparties.

As a result, the new world will be a mix of electronic and the traditional voice trading models. Both will see their fair share of cutting-edge tools designed to finetune and improve the lifecycle processes. In both cases, relationships will also remain the backbone and counterparties who can provide the liquidity will be the most valued.