23 Jul

Embracing Evolution in Fixed Income Trading

Highlights from the piece published on TABB Forum (which is only a 3 minute read) - available at

The Fixed Income and Derivatives market is evolving, rapidly migrating away from the phone onto electronic venues. Electronic trading satisfies the requirement to capture accurate data and report it to regulators and Compliance departments, combined with the need for liquidity, and the incessant demand for increased efficiency in the middle- and back-office.

As a result of these drivers, there is now a market-wide issue: market fragmentation. There are now 156 e-trading venues in the Fixed Income market (the latest numbers from the comprehensive list compiled by John Greenan, from Alignment Systems).

Connectivity is Key in Fragmented Markets
The problem for larger financial institutions is that they are struggling to connect their systems to these trading venues. Many of these venues have different workflows or different APIs for each asset, meaning that there are more than 230 API specs for the 156 venues.

Connecting to any one of these new venues takes too long and is too expensive. The process typically takes 3-6 months and even then, there’s no guarantee that there won’t be a new ‘must have’ platform to replace it a year later. Plus, venues periodically upgrade APIs to add functionality or new fields. It takes time and resources to code and test before updated systems can be released into production.

The scale of the problem becomes apparent when you multiply the workload required to connect to a venue by the number of venues on which you want to trade. We have found there to be a core of about 30 e-trading venues, but in some instances we are being asked to connect with, and manage connectivity with, 70 APIs.

Efficiency – Boring but Important
There is an argument that the pace of market fragmentation will slow, but even if it does it is clear that fragmentation is here to stay. Which means efficiency is key.

There is significant pressure to cut costs and increase efficiency in the financial markets. As an example, Basel II means that the major dealers are unable to hold a large bond inventory on their books, which is changing the structure of the market – it leads to market evolution, with more all-to-all trading venues in Fixed Income being established.

The problem is, these new venues are struggling with poor liquidity, due to technology queues and the time taken to connect.........................……and so the evolutionary wheel turns!