How electronification has accelerated in the US credit markets

This content was originally published in TabbFORUM

Electronic trading in credit markets has recently reached new heights of volume and momentum. In this article, Edoardo Pacenti, Head of Trading Tools, Fixed Income at ION, makes the case that advances in technology will continue to reform the historically rigid fixed income sector and those who use technology will gain a competitive advantage through the ability to adapt investment strategies quickly as market opportunities evolve.

In the past, the fixed income sector lagged other financial markets in adopting automated processes. The fragmented and complex nature of the sector made it harder for firms to find the most efficient way to source liquidity and offer customers fast and accurate services.

By contrast, the standardized nature of stocks made it far easier for other asset classes – such as equities – to apply automatic trading techniques.

In fixed income, bonds’ varying issues, structures, and maturities forced traders to rely on more traditional approaches. Even those trading firms seeking increased efficiencies found potential workflows too complex to automate, such that manual trading persisted. As a result, the personal relationships remained paramount in credit markets, with phone calls and manual processes getting the deals done.

Recent years saw the start of a shift. In 2024, electronic trading in credit markets reached new heights of volume and momentum, extending into previously unreached portions and embedding deeper into workflows. A diverse ecosystem has since surfaced, featuring innovative, tech-savvy newcomers and established players willing to adapt to change and intensely competitive, ever-evolving trading venues.

While voice execution is often still the primary choice for larger or more complex trades, Barclays’ latest market structure survey found that 60% of credit market participants now use automated execution – up from 40% in previous years.

The COVID-19 pandemic initially catalyzed electronification in fixed income markets. Traders had to work from home and needed immediate remote trading solutions. These solutions highlighted the benefits of automation, such as the reduced need for intermediaries, lower brokerage fees, and fewer administrative costs.

Now, 49% of US investment-grade corporate bond trading is electronic.

However, workflow automation, cost reduction, and resource savings are not the sole drivers of electronification. Conversely, coinciding market developments in the last few years have given electronification additional momentum.

Harnessing data is paramount

For example, the introduction of consolidated tape in the US bond markets catalyzed electronic trading. By providing reference for prices, volumes, and timings for a specific asset class, it radically improved transparency across trades.

The emergence of the Trade Reporting and Compliance Engine (TRACE) introduced unparalleled levels of price transparency to the US bond market, and in 2017 incorporated US Treasuries too.

TRACE enables firms to conduct robust research into credit markets based on the newly available data. This gives them a more thorough view of the bond market, helping to shape credit strategies, and other offerings.

To support the volume of data now available, traders are moving towards automated platforms that offer dashboards, heat maps, and customizable charts. These tools allow users to see prices, spreads, and yield curves in real time, and in a visually intuitive way that enables traders to spot trends and anomalies quickly across multiple bond markets.

The rise of ETFs

The rising popularity of fixed income Exchange-Traded Funds (ETFs) over the past few years has paralleled market electronification.

Market volatility and an extreme squeeze on liquidity in fixed income caused credit ETF volumes to shoot up during the COVID-19 crisis. To combat this, investors sought to mitigate their exposure to underlying bonds.

Fixed Income ETFs trade on a multi-dealer electronic platform (MDP), which provides access to several liquidity sources.

With MPDs continuously looking to improve their service offerings, platforms have placed heightened importance on offering API-friendly electronic trading solutions. These allow traders to integrate trading platforms directly into their workflows, automate trading, access real-time data, and analyze historical information programmatically.

J.P. Morgan forecasts that, by 2030, the global fixed income ETF market will grow to $6 trillion. The US market will capture a significant portion of that growth.

The popularity of ETFs has made automation and front-to-back workflow integration the most viable options today for trading desks to support the massive volumes of transactions and data flowing in.

Adoption of AI and ML into workflows

Electronification is likely to take a giant leap forward due to the increasing adoption of Artificial Intelligence (AI) and Machine Learning (ML). Already, these technologies are advancing the use of electronic trading in fixed income markets.

AI-powered execution algorithms optimize trading routes by selecting the best venues and times for trading specific bonds. By factoring in liquidity, spreads, and market depth across platforms, traders can achieve best execution.

The implementation of AI into the fixed income sector is still in its early days. As technology continues to evolve, AI’s role in supporting advanced trading strategies and enhancing portfolio management will likely expand, reshaping the trading landscape.

There are no signs of electronification slowing down

Advances in technology are reforming the historically rigid fixed income sector. “Why?” the industry should adopt more automated processes is no longer the question. The benefits are clear – it makes trades easier and more efficient. Now, the question is “How?”; how is best to implement, and how can traders keep up with the technology.

Those who use technology will gain a competitive advantage through the ability to adapt investment strategies quickly as market opportunities evolve. Whatever the credit trading strategy, implementing automated systems to improve efficiency throughout the trade lifecycle is inevitable.