The rise of electronification in US credit markets

Key Takeaway

• Half of US investment-grade bonds traded electronically.
• Portfolio trading, ETFs, and the availability of data are driving adoption of electronic trading.
• Electronification is critical to best execution but will not replace humans.

Credit markets have long played catch-up with their equity counterparts when it comes to electronification.

While the standardized nature of stocks has made it far easier to apply digitized trading processes, bonds’ varying issuers, structures and maturities have forced traders to rely on more old-school approaches.

As a 2024 report from Barclays Investment Bank notes: “Plenty of deals will still be struck the old-fashioned way, by calling up a broker-dealer… [since] unlike the world of equities, where companies tend to be embodied by a single, fungible security, each issuer of bonds tends to have a variety of instruments that differ in ways that make them harder to trade and harder to track.”

Yet the idea that credit markets are an underserved, outdated sector no longer reflects the true state of play.

In 2024, almost half of U.S. investment-grade (IG) bonds were traded electronically. For high-yield bonds, the adoption of electronification has been no less significant; the share of electronic trading has grown from 25% in 2019 to 45% this year, according to data provided by Coalition Greenwich.

The proliferation of electronic trading has been driven by several factors.

The most obvious is the Covid pandemic when traders were obliged to work from home and required immediate remote trading solutions.

Automation reduces the need for intermediaries, reducing brokerage fees and administrative costs. Electronic workflows also reduce errors, lowering back-office costs.

But electronic trading is not all about workflow automation and the obvious cost and resource saving benefits, and in the last few years a host of coinciding market developments have ensured the momentum for electronification remains.

Data deluge

Critically, the introduction of a consolidated tape in US bond markets has been a boon for electronic trading by addressing transparency, liquidity and data availability challenges. TRACE began in 2002 and in expanded stages, incorporating US Treasuries in 2017.

TRACE enables better price discovery, facilitates regulatory oversight and reduces information asymmetry, all of which create a more conducive environment for electronic trading to expand.

But with so much data sloshing around, market participants need sophisticated systems to support client analytics and trading recommendations.

Today’s platforms offer dashboards, heat maps, and customisable charts, enabling users to see real-time prices, spreads, yield curves, and other indicators in a visually intuitive way. This helps traders quickly identify trends and anomalies across multiple bond markets.

The impact of ETFs

In the last few years, the rise of fixed income exchange-traded funds (ETFs) has created something of a virtuous circle for electronic trading in credit markets.

Fixed income ETFs trade on multi-dealer electronic platforms (MDPs) that provide access to numerous liquidity sources.

More multi-dealer platforms have entered the market, democratizing the fixed income sector. This allows smaller firms, individual investors, institutional investors, and asset managers to make better-informed decisions without needing extensive resources.

The circle continues to turn with MPDs keen to improve their service offerings. For example, it increasingly apparent that platforms place significant importance on offering API-friendly electronic trading solutions which allow traders to integrate trading platforms directly into their workflows, automate trading, access real-time data, and analyse historical information programmatically.

Advancing AI

It is no surprise that the rise of artificial intelligence (AI) and machine learning is advancing the electronic trading in fixed income markets.

AI-powered execution algorithms optimise trade routing by dynamically selecting the best venues and times for trading specific bonds. This helps traders achieve best execution by factoring in liquidity, spreads, and market depth across multiple platforms.

AI is nowhere near finished with the bond markets. As the technology evolves, its role in supporting advanced trading strategies and enhancing portfolio management will likely expand, reshaping the trading landscape.

Human touch

While the excitement of electronification is undoubtedly buzzing across the bond markets, the reality is that robots will never fully replace the human touch. Tailored, relationship-driven execution services and trust in providing liquidity when it matters add value to the high touch workflows managed by experienced traders.

While electronic trading increasingly does the heavy lifting, this will free up traders to effectively drive the trading activity from a bird’s eye view and focusing on the high value trades, similarly to what is already done across other more mature asset classes like rates, derivatives and mortgages.