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Some trends quietly fizzle out without leaving a mark. Others implode, with everyone wondering what on earth we were thinking — like Tamagochis or fidget spinners. Occasionally, a halting, haphazard trend suddenly hits a point where it starts spreading like wildfire, and its success feels like it was always preordained.
Electronic bond trading fits the latter category. Fixed income markets have historically been overwhelmingly analogue. Some corners have slowly been dragged into the modern, digital era of trading — the bigger, more homogenous and liquid government bond markets especially. But, on the whole, trading has long stayed bilateral, bespoke and arranged by phone or Bloomberg messages.
The bond market was simply too fragmented, too idiosyncratic — just too dang messy — to be electronified like equities, many in the industry felt. While there are about 41,000 stocks in the world, there are millions of bonds, almost all of them with unique characteristics. Many trade only by appointment, if at all. Of the 21,175 corporate bonds outstanding in the US in 2018, only 246 of them traded at least once a day that year, and a sixth did not trade at all, according to Citi.
Things started to shift dramatically after the financial crisis. Stricter regulations forced banks to shut down proprietary trading desks and hamstrung their market-making desks by making big bond inventories more costly to carry. That spurred both banks and investment groups to modernise their trading infrastructure.
Meanwhile, bond exchange traded funds grew quickly in popularity, both enabling and encouraging more algorithmic trading. Most mainstream government bond trading is now electronic, and it started making inroads into more traditionally bespoke areas, such as corporate debt. Line chart of Percentage share of electronic bond trading showing The dawn of the bond market’s digital era?
The Covid-19 pandemic could easily have interrupted this trend. After all, times of economic and financial strife should in theory favour the human touch of an experienced trader. Instead, it has supercharged the shift towards electronic trading — and now threatens to upend the entire bond market ecosystem far quicker than predicted a year ago...