Single-dealer e-trading of fixed income on the rise

Electronic trading of cash bonds and credit default swaps is not new to Asia, but dealers are increasingly rolling out platforms that allow investors to trade with each other without the need for market-makers.

These platforms allow buy-side clients to broadcast offers and seek liquidity anonymously, as they can in dark pools for equities, but some on the buy-side have expressed reservations about such offerings.

As much as 70% of fixed income e-trading in Asia takes place on Bloomberg's multi-dealer platform, but investors in the region are gradually trading assets such as sovereign bonds and treasuries on electronic single-dealer platforms, say industry players.

Hundreds of clients in Asia-Pacific have migrated from voice to electronic for both regional and global cash products, and electronic fixed income trading volumes in the region continue to increase year-on-year, with 2012 being a record year, notes Gavin Ottery, head of fixed income e-commerce sales at UBS in Hong Kong. He did not give specific figures.

UBS's electronic fixed income platform, Pin-FI, is offering instruments such as Australian government bonds and Asian credit to clients based in the region, he notes.

Other dealers with fixed income e-trading platforms include Citi, although the US bank has only rolled out the service to select UK and US clients so far.

Electronic trading of bonds on multi-dealer platforms allows investors to view bid/offer quotes on screen and trade directly with the dealer offering the best price. It saves investors time in that they don't have to request quotes from dealers.

Paul Hamill, head of fixed income agency trading at UBS in New York, says the bank is the principal facing clients in all transactions. This allows them to send their inquiries for bids and offers to other clients anonymously.

“[Clients] have the discretion to accept or reject a trade at all times as well as being able to improve the price by sending inquiries inside the bid/ask spread,” says Hamill.

UBS is talking to two other dealers about them joining as market-makers to help improve liquidity for the 2,000-odd retail and institutional cash bond clients on its Pin-FI platform.

Buy-side-to-buy-side liquidity pools are common alternative trading venues for equities, such as dark pools, which offer spread improvement and anonymity.

But in recent months, efforts by bond dealers such as Citi and asset managers like BlackRock to launch single-counterparty liquidity pools for buy-side bond trading has underlined a trend for dark electronic trading venues similar to those for equities.

This trend is partly a response to rules limiting dealers' ability to warehouse risks. More onerous capital requirements under Basel III and constraints on bank proprietary trading under the US's Volcker rule have led global bond dealers to explore e-trading as a distribution channel.

Data from the US Federal Reserve shows that bond inventory held by global dealers is less than a quarter of the $235 billion it reached at its peak in 2007.

Another driver of dealers' moves to offer electronic trading is investors' appetite for more efficient ways to trade and hedge their positions, reduce human booking error, create direct links with post-trade processes and keep better records.

But some investors are sceptical about single-counterparty platforms. “Any single point of liquidity not connected to other dealers for competition is ultimately not good for clients,” says Jason Lenzo, director of equities and fixed income trading at Russell Investments.

“There is potential for information leakage, where the single counterparty would have the choice to view the order flow, but would not necessarily be forced to respond to the request,” he adds. “They are essentially given a free look.”

A feature on electronic trading of fixed income will be published in AsianInvestor’s upcoming April issue.