Mapping of Bond platforms in Europe (ICMA study)

An interesting report from The international Capital Markets Association (ICMA ), has mapped the features and coverage of European Bond Trading Platforms.

According to the report, the European bond market trading has become increasingly electronic due to a natural evolution of trading, and more recently, as a by-product of regulation. Market participants have a regulatory obligation to evidence best execution and meet transparency obligations, but more importantly need to source and optimise liquidity.

The fixed income landscape is currently very fragmented. The reduction in balance sheet due to Basel III combined with investors’ reluctance to trade has led to a diffusion of liquidity across platforms. This is particularly the case in corporate bonds where it is often heard that liquidity is “a mile wide and an inch deep”.

Here is a chart from a previous post which shows the lack of inventory being held by dealers, making it harder for investors to find the liquidity they require.

Bond inventoryChart showing Net Bond inventory held by primary dealers (McKinsey/Greenwich)

Sourcing and aggregating liquidity is paramount for sell-side and buy-side traders. Technology is the only way to enable these participants to uncover the liquidity available. Understanding the contrasts and capabilities of new and more traditional platforms, is the first step to choosing the best execution venue or information network available in the market.

ICMA has undertaken a capabilities mapping initiative for participants in European fixed income markets to better understand the unique selling points of various electronic trading platforms (ETPs) and information networks. By offering a centralised one-stop shop to research the e-trading skills available in the market, ICMA members will be able to compare and contrast the various ETP providers in order to determine which platforms best suit their investment and/or trading strategies.

Below is a summary of some of the mapping table content. The full table is available here

ICMA Mapping

Mapping table showing Bond platform features (Source ICMA study)

SmartTrade has recently announced the launch of a new Fixed Income solution designed to enable banks to service their clients electronically in fixed income, and according to David Vincent, CEO;

“smart-FI takes what is being done in FX and brings it to liquid fixed income products.”

Mckinsey have a great chart that shows the evolution of electronic trading, showing the products that are ‘e-traded’, and the success drivers.

Electonifation of markets1

 Evolution of electronic trading (source McKinsey)

Looking at the products in the red rectangle, we see the more liquid and standardised products are suitable for electrification.

The table below, which is based on new research from Celent into European Fixed Income Market Sizing called Electronic Strikes Back, shows that in the dealer to client (D2C) segment for fixed income execution, multi-dealer platforms (MDPs) are by far the major electronic channel both in rates and credit products followed by retail platforms, with only limited flows going through single-dealer platforms.

Fixed Income execution methods1

Execution methods in Dealer to client (D2C) Fixed Income market in Europe 2014 (source Celent)

The above chart on execution methods in fixed income, is of course in sharp contrast to FX, where execution through SDPs and MDPs are almost equal. However, in fixed income, with banks pulling back in terms of liquidity provision, access to liquidity remains the biggest challenge for investors, and according to a report by Fixed income Leaders, bench-marking research by Fixed Income Leaders, some 73% of investors cited sourcing liquidity as their biggest challenge, with some 48% of investors looking to try to resolve this in less liquid products by undertaking buy-side to buy-side trading using some of the new liquidity discovery platforms being launched (such as Algomi, and others).

Although given the number of new initiatives, not all will survive, as evidenced in July when BondCube closed after just three months.

In terms of market share concentration, it seems just like in FX the top-tier banks still dominate Fixed Income, and according to Celent analysis the top five banks have 50% share in European fixed income trading. However, just like in FX the top banks are beginning to lose market share to regional Tier 2 & 3 banks. In 2014 the top five banks have lost 4% market share, whilst banks #6-12 have actually increased market share by 6%. This is partly due to some top-tier banks pulling back from some markets and partly due regional banks investing in new technology and stepping up to provide liquidity to clients.

–Tier I (top 5) market share down 4%

–Tier 2 (#6-12) market share up 6%

Market concentration in Fixed income

Market concentration in European Fixed income (source  Celent)

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