Fixed income trading on the cusp of change as EMS technology evolves

Key Takeaways

• EMS take-up expected to rise in the next 12 months
• Firms recognize need to eliminate time-consuming manual processes
• Latest EMS models dispense with need for multiple systems

Fixed-income trading has historically lagged behind other financial markets in technological advancement, and it is likely to take a giant leap forward in the future due to the adoption of Artificial Intelligence (AI) and Machine Learning (ML).

However, more immediately, market participants are becoming increasingly aware of the capabilities offered by execution management system (EMS) technology and are keen to adopt more sophisticated trading techniques and automation. A recent comprehensive survey of the sector’s technological progression suggests that there is likely to be substantial transformation within the next year, with a continued shift away from cumbersome processes.

As we wrote recently, firms must improve efficiency and performance and better mitigate risk as seismic forces alter market parameters. A shorter settlement period (T+1), competition from new entrants, and the emergence of new trading models such as portfolio trading and liquidity fragmentation are a few of the obstacles market participants face.

Technological evolution for fixed-income trading

Although the most liquid markets in government bonds, interest rate swaps, and some credit and credit derivatives trade electronically, full trading workflow digitalization is not yet widespread.

However, according to the recent joint report produced by Coalition Greenwich, firms realize the urgency of upgrading their technology stacks. Even five years ago, managing liquidity and data fragmentation in fixed-income instrument trading was much easier and could be done with simple tools. With the proliferation of new-age products, traditional methods are fast becoming insufficient for effective management.

For example, the US market alone boasts at least seven notable corporate bond trading venues and almost as many providers of evaluated pricing. In addition, there are dozens of dealer axes and runs that must be consolidated and analyzed. Today’s traders recognize the need to eliminate time-consuming processes and leverage more data effectively via trading venues to remain competitive and operate efficiently.

This shift is already evident among sophisticated asset managers and hedge funds, which are adopting EMS or EMS-like functionalities to streamline and improve fixed-income trading workflows. More significant trading technology changes are expected in the sector in the coming months, according to the Coalition Greenwich report.

Current trading practices for fixed income instruments

Traders across various markets are at different phases of their electronification journey. As of early 2024, about 44% of investment-grade bonds and 29% of high-yield bonds were traded electronically; still, ‘request for quote’ remains the most common execution protocol, according to the report.

The shift to electronification is motivated by asset class “readiness” and attitudes toward e-trading, the report says, explaining why algorithms and automated trading systems are not yet widespread

“Gaps in the availability and maturity of trading technology have historically inhibited the adoption of advanced tools and automation,” it adds.

For instance, traditional traders continue to use only voice and chat. Another section of traders has started working on trading venues and order management systems (OMS) and believes these are the right fit for their business. However, they are not yet ready to invest in a dedicated EMS.

Technological pain points

Almost all traders experience technological pain points with their fixed-income trading technology, owing to factors like fragmented technology stacks, poor system interoperability, manual errors, and data access challenges. Here is a look at several of the obstacles:

• Using multiple applications: Traders continuously juggle between applications that lack integration, complicating the data collection and analysis process. They may receive runs and pricing information from multiple providers, analyze them in one application, and execute trades in another – none of which are connected.
• Comfort in simpler tools: Another common trend is that traders prefer specific trading platforms or to work directly with a counterparty. While these familiar practices offer comfort, they lead to workflow inefficiencies. For example, most traders use voice and chat along with one or more trading venues, restricting their view to a particular segment of the overall market. They are likely to miss out on information that may exist outside of a counterparty’s network or liquidity pool in the process.
• ROI concerns: Cost and justifiable return on investment (ROI) are other factors that deter traders from adopting new solutions. For them, specific external costs, such as electronic trading, vendor fees, and internal costs, act as significant inhibitors. Another major concern for the traders is the lack of technical resources necessary to build and support an EMS while keeping up with other applications and priorities.

Future of trading

The benefits that EMS can provide fixed-income traders are clear, but obstacles remain, including fragmented systems, data access, and using multiple applications.

EMS and OMS nomenclature existed in the late 1990s, but the databases built 30 years ago are no longer suitable for today’s market or technology landscape.

Today’s trading solutions must focus on meeting the specific needs of traders in real-time, like aggregating data from various sources, integrating with liquidity providers, and ensuring seamless connectivity with other systems.

Newer EMS models, as ION wrote in December, can streamline and digitize the entire dealer-to-customer (D2C) trading process and be instrumental in achieving best execution across different bond asset classes, helping negotiate prices efficiently and transparently.

Volatility and the changing dynamics of fixed income markets make new-age EMS a must-have technological tool as firms eliminate time-consuming manual processes.