Trading the Future, How Technology is Reshaping the Bond Market
Trading the Future How Technology is Reshaping the Bond Market
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Bond trading is starting to be digitalized
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Electronification is driving the growth of bond ETFs
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G3 bond issuance from Asia (ex-Japan & Australia) is on track this year to beat the record set in 2017
Even as technology has transformed financial markets, whether in equities or interest rate swaps, bond trading is still dominated by voice, with deals primarily done over the phone. But that’s starting to change for this multi-trillion dollar fixed income industry. Like everything else in global finance, it is now being disrupted by technology.
Institutional investors are putting more money in artificial intelligence tools such as algorithms that handle and execute bond transactions. In the U.S., AllianceBernstein’s AI trading bot “Abbie” helps size and organize junk bond trades for the investment group’s fund managers, while Dutch lender ING’s “Katana Lens” software identifies and compares bond-trading ideas for clients.
In turn, electronification is driving the growth of bond exchange-traded funds (ETFs) among global portfolio managers. About 60% of institutional investors invest in bond ETFs, up from just 20% in 2017, according to studies by Greenwich Associates. With bond ETFs currently accounting for less than 1% of the world’s bond marketplace, the growth potential is immense.
BOND ETFs: GROWTH IN INSTITUTIONAL INVESTMENT
BOND ETFs IN THE MARKETPLACE
Recognizing that market participants are ready to adopt new ways of trading, Singapore Exchange (SGX) is among those in the industry driving digitalization in fixed income.
It is building out SGX Bond Pro, an institutional trading screen for Asian and Emerging Market bonds. Launched at the end of 2015, the platform today offers G2 Asian and EM sovereign and corporate bonds, as well as SGD corporate bonds.
With over 200 clients, Bond Pro has gained critical mass, with active participation from global and regional dealers, bank treasuries, wealth and asset managers, family offices and hedge funds across Asia-Pacific, the U.K., Switzerland and the Middle East.
What’s next for SGX? Enabling its institutional clients to complete larger transactions as Bond Pro grows into a leading marketplace for G3 Asian bond trading.
“Electronification is really only just starting in fixed income. The next three to five years is going to be very exciting for the bond markets.”
– Mark Leahy, head of fixed income at SGX
Against an external backdrop of uncertainty, such as concerns about the world economy and whether the Federal Reserve may further cut interest rates, SGX is working with industry participants to position for further growth.
With the exchange assuming the general counterparty role for SGX Bond Pro, clients can execute trades in a safe, efficient manner while maintaining full pre-trade and post-trade anonymity. That’s where the real opportunities will be for platforms in the next three years, Leahy said.
The exchange also appointed Standard Chartered Bank as its sole settlement agent bank for bond trading, providing transaction securities services support and ensuring a seamless post-trade process. The partnership is growing as both companies invest in technology and enhance their offerings.
“We’re very proud to have grown in strength with SGX to become the largest settlement bank in Singapore, settling most of the transactions across SGX. We also service a lot of SGX’s financial and foreign currency requirements.”
– Patrick Lee, CEO of Standard Chartered Bank Singapore
When it comes to digitalizing the industry and the future of bond trading, U.S. corporate bond trading platform Trumid is one of the fastest-growing fintech companies in this space. Following a strategic investment from SGX, Trumid can tap on the exchange’s network in Asia to offer global access to U.S. dollar credit products, unlocking greater liquidity.
“Our partnership with SGX is a mutually beneficial one that we look forward to continue expanding over time. We’re excited about the ability to bridge global liquidity pools and are working together to design innovative solutions for our clients. We believe the Asian fixed income market will be an exciting growth area.”
– Michael Sobel, president of Trumid in New York
Bond markets have tremendous growth potential for issuers and investors, particularly with the search for incremental returns and yield amid an environment of low interest rates. The first week of September saw unprecedented activity with investors buying into more than US$140 bn of new corporate bonds, Dealogic data showed.
G3 bond issuance from Asia ex-Japan and ex-Australia is on track this year to beat the record that was set in 2017, according to industry estimates.
“The opportunities that SGX has identified in fixed income clearly are driven by the electronification wave,” Leahy said. “We’re building a high-quality regional client network – focusing not just on the big sell-side and buy-side accounts, but also on those regional accounts that are very important to the Asian bond markets.”
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