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Institutional Adoption of Electronic Fixed Income Trading Systems Is Poised For Growth, Here’s Why

Three reasons the combination of technology, analytics, and Alternative Trading Systems (ATS) will be key factors to bond trading success in the New Year.

Michael Chuang, Founder and CEO, iTB Holdings Inc.
Michael Chuang, Founder and CEO, iTB Holdings Inc.
Last year was a year where the various players within the corporate bond electronic trading industry rolled out exciting new products aimed to address the needs of both the buy and sell side.

Let’s take a look at three reasons why the combination of technology, analytics, and Alternative Trading Systems (ATS) will likely be key factors to bond trading success in the New Year.

1. Retail Investors Are Likely the Only liquidity Providers in a Market Sell-off – The long awaited Fed tapering has started in 2013 and will continue into 2014. Even though US economic data has been weak and thus limiting a bond market sell-off, when interest rates do rise the likely flow of bonds will be out of institutional asset managers and into the hands of retail investors. In fact, an analysis of TRACE data shows retail investors generally buy more bonds than they actually sell.

During Q3 2013, retail-sized investment grade corporate bond trades (less than $100k in notional volume) had 1.43 buys for every 1 sell. In contrast, institutional-sized trades (between $1mm and $25mm in notional volume) had a buy/sell ratio of exactly 1 to 1. From a buy/sell ratio perspective, smaller investors have bought more high grade and high yield bonds than institutional investors since at least 2008. Alternative Trading Systems with both institutional and retail investors have a diversified client base to facilitate some of this risk transfer organically by matching sellers to buyers.

2. Continued Growth of the Fixed Income ETF Industry Requires Better Electronic Liquidity – According to Blackrock, U.S. ETF assets have grown at an annual rate of 27% over the past 10 years, compared to 7% for mutual funds. More importantly, Blackrock expects the fixed income ETF market could grow to $2 trillion in the next 10 years, a 10-fold increase from where we are today.

The efficiency of ETFs can’t be ignored and part of their low cost nature is due to sophisticated trading capabilities of ETF industry participants. By leveraging natural liquidity on both RFQ and ATS platforms, ETF industry participants with advanced trading technologies are poised to execute trades better and more efficiently than traditional managers, keeping ETFs advantages of a lower cost structure for years to come.

3. With Greater Technology Sophistication of Market Participants, Fixed Income Data and Analytics Become More Important than Ever – As the usage of trading technology grows, market data and analytics is the food to fuel that growth. The marketplace now has more fixed income data than ever before.

As already proven in other asset classes, participants who have the ability to analyze data in real time will develop a greater edge than their competitors and thus increase profitability. For instance, one of the most actively traded fixed income ETFs is the iShares iBoxx Investment Grade Corporate Bond ETF from Blackrock with ticker LQD. At any given moment, there are now real time bid and offer prices on over 90% of the 1,130 constituents that make up the LQD ETF. Traders that leverage analytics to decipher this data will have a true advantage over traders that don’t as we head into 2014.

As 2013 fades into distant memory, we have much to look forward to as technology, analytics, and ATS continue to play a greater role in corporate bond trading in the New Year. The Pulitzer Prize winning author Jared Diamond once said “Technology has to be invented or adopted”. This will be the year of adoption rather than invention.

Michael Chuang is the Founder and CEO of iTB. He has over a decade of experience within the fixed income markets in both sales and trading capacities. Most recently, Michael was the Director of Fixed Income Sales at UBS Securities LLC managing trading relationships with numerous institutional clients. Previous to UBS, he was a Vice President at Lehman Brothers and was responsible for business development as well as sales and trading of interest rate, credit, derivatives, and MBS products. Michael serves as the CEO and Board member of the firm's parent Company, iTB Holdings Inc.

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