* Coronavirus a catalyst for electronification of bond
markets
* But traditional 'voice' trading still key in fixed income
* Calls grow to take corporate bond issuance electronic
-Goldman
By Dhara Ranasinghe and Saikat Chatterjee
LONDON, June 22 (Reuters) - The mammoth bond market has long
been the old-school bastion of the financial world, but the
COVID-19 pandemic has cast a light on its future - and it looks
electronic. Well, mainly.
At the height of the market panic in March, Seattle-based
Brandon Rasmussen, a senior fixed-income trader at $300 billion
asset manager Russell Investments, had a client order to sell
$2.5 billion worth of U.S. Treasuries.
He found, though, that such a transaction was
near-impossible in a highly volatile market that made no
exceptions for even one of the world's most sought-after assets.
Dealers refused to quote prices by phone, adding to the
stress of executing a large order without distorting the market.
The solution Rasmussen eventually settled on was to break
the order up into smaller chunks and process them electronically
- something he may not have considered a few weeks earlier.
"The feedback that we got from dealers was that they were
not quoting on the phone. They couldn't do that, they couldn't
keep up with that," he said. "I think what this crisis has shown
is that really if you weren't trading electronically, you should
be trading electronically."
His experience illustrates how the volatility caused by the
crisis, along with a new remote mindset of working from home,
has pushed more traders to go digital in a market that has
historically lagged stocks and forex in electronification.
That trend is reflected in the business on electronic
bond-trading platforms.
For example MarketAxess, one of the biggest
players, enjoyed record trading volumes in March. At rival
Tradeweb, average daily turnover hit a record aggregate $1
trillion in that month, a more than 41% year-on-year increase.
Meanwhile MTS, part of the London Stock Exchange Group
, said it won several large asset managers in Europe as
clients during the crisis.
Yet traders stress that dealers and clients speaking to one
another will long remain a key component of the industry,
especially at times of heightened volatility.
Even as Rasmussen went electronic to push through his trade,
for example, he was also talking to buyers to agree "switches" -
swapping one type of U.S. bond for another to share risk.
The jump in electronic trading activity coincided with both
a rush into government bonds as the coronavirus sparked demand
for safe-haven assets, and then a sharp selloff as investors
sold their most liquid assets to make up for losses elsewhere.
LIQUIDITY & TRANSPARENCY
Electronic trading - where transactions are carried out
using software on online platforms, rather than via
dealer-client "voice" trades - can carry major benefits for the
$100 trillion-plus world of government and corporate debt.
Regulations such as MiFID II in Europe to improve
transparency have also boosted electronic trading.
For one, traders executing deals can quickly gauge market
depth on their screens, freeing time for more complex trades.
For another, it offers lower costs for investors; two dealers
estimated it to be 10%-30% cheaper than traditional voice
trades.
Nonetheless, while most bond industry players acknowledge
that much of the future is digital, many have been reluctant to
go fully electronic.
Around 45% of the European fixed-income market is
electronically traded, versus 38% a year ago, consultancy
Greenwich Associates estimates. In the $6.6 trillion-a-day
currency market, 90% of spot trading is conducted digitally.
However the COVID-19 crisis is accelerating the
electronification of the bond market, according to industry
players.
Many such as Tony Rodriguez, U.S.-based head of fixed income
strategy at Nuveen Asset Management, said a need for greater
liquidity had boosted electronic trading activity.
"A lot of trades were pushed electronically because of
greater liquidity and transparency - so the crisis pushed what
was already in place," he said.
Andrew Falco, global head of FX and fixed income trading at
Fidelity International in London credits electronic trading with
allowing connectivity in a market suddenly dispersed by remote
working.
This kind of technology enabled the transition from working
in an office to working from kitchen tables, he told Reuters.
He said some lessons had been learned about this last year
when Fidelity's Hong Kong team struggled to work in the office
because of the unrest roiling the city.
"So for us in 2020, we finessed the e-trading home set-up
and ensured it worked well, whether it was in HK, Shanghai,
Dublin or the UK," he added.
'IMAGINE THIS 25 YEARS AGO'
For the banks who provide dealer and execution services,
though, the electronic shift may be eating into fixed-income
revenues; during the March quarter, earnings from bond trading
at the world's biggest 12 banks remained below levels seen in
2014, research firm Coalition calculates.
But they too are accelerating the push to digital services,
particularly for the automation that helps them when volatility
spikes.
JP Morgan, for instance, uses an algorithm to help generate
price quotes on its forward FX platform, which includes bonds,
fielding "hundreds of thousands of enquiries" and transacting
"thousands of trades a day" during the crisis, said Tom
Prickett, co-head of EMEA rates at the bank.
Another big player, Goldman Sachs, said clients ramped up
calls for the electronification and automation of companies'
bond sales, until now a slow process conducted manually.
"The crisis revealed some of those shortcomings in bright
lights," said David Wilkins, Goldman's head of FICC execution
services in EMEA.
Investors and traders acknowledged that digital technology
had been a saviour during the pandemic, a view expressed across
a host of industries.
"Imagine something like this happening 25 years ago, when
emails didn't exist, electronic communication was not really
there," said Zoeb Sachee, head of euro linear rates trading at
Citibank who oversees government bond trading in European
markets.
THE OLD AND THE NEW
But, for the foreseeable future at least, the bond market is
likely to encompass the old and the new: technology as well as
traditional trading models based on dealer-client relationships.
Traders of European investment-grade corporate bonds during
the crisis often negotiated deals by phone before using a
platform to settle, according to an International Capital Market
Association (ICMA) report.
"Bond markets are very much relationship-driven and I don't
see how that goes away," said report author Andy Hill.
This was echoed by Falco at Fidelity.
"The view that we felt as a team was that we would use
technology where we had confidence in the price that we could
see on the screen, and when we didn't have the confidence in the
price, we would execute manually."
(Reporting by Dhara Ranasinghe and Saikat Chatterjee; Graphic
by Ritvik Carvalho; Editing by Sujata Rao and Pravin Char)