Fixed-Income Products Fail to Go Fully Electronic

Electronic trading has flourished in the U.S. fixed-income market, the largest fixed-income marketplace in the world, representing about 40 percent, or $27.4 trillion, of the $68 trillion in outstanding debt worldwide. New research from Boston-based Celent, however, reveals that not all types of fixed-income securities are experiencing electronification at warp speed.

In 2003, electronic trading of fixed-income products -- municipal securities, treasury securities, federal agency securities, corporate bonds, money market instruments, mortgage securities and asset-backed securities -- hovered at about 30 percent, according to Celent. In the four years since, electronic trading has grown to represent more than 60 percent of the market, a compound annual growth rate of 19 percent, the research and advisory firm reports.

But Celent's estimates indicate a disparity in which instruments are getting the electronic treatment disproportionately, although electronification tends to follow one major trend -- liquidity. The most liquid instruments, U.S. Treasury and mortgage-based securities (MBS), are far more likely to be traded electronically than other fixed-income securities. Electronic trading accounts for nearly 88 percent of Treasury securities and more than 31 percent of MBSs, according to the research.

But electronic trading is considerably less developed in illiquid segments of the market, such as federal agency, federal, and corporate bonds. Celent estimates that electronic trading accounts for 15 percent of federal agency securities, 10 percent of corporate bonds and 8 percent of municipal bonds. According to Celent, in the next few years, electronic trading of municipal bonds likely will jump the most; the research predicts 2 percent growth in electronic trading by 2010.