Asian countries have not escaped the economic fallout from the Covid-19 pandemic, despite early lockdowns, closed borders, and track and trace systems. In the first half of the year, unprecedented volatility shook financial markets across all assets, including the regional US$16.3 trillion fixed-income space.
Under such extraordinary market conditions, fixed-income traders have had to consider new ways of operating to ensure they can complete their trades. We were already seeing growth in digitization of trading workflows, but the health crisis and the subsequent shift to a virtual working environment have accelerated this trend. This is because electronic trading provides tools that can facilitate access to liquidity at a time when volatility can make it harder to buy and sell assets without affecting the price.
While electronic trading has been the standard for equities and foreign exchange in Asia for many years, fixed income has lagged behind, where much trading is still being conducted via voice. The proportion of regional debt traded electronically can vary quite dramatically, from 10% to 40% of secondary market activity – much lower levels than in Europe or the United States.
Respondents to an International Capital Market Association (ICMA) survey in 2019 pointed to a cultural explanation for the reliance on phone-based trading, with local traders placing value on the relationship with dealers. Concerns about information leakage and its potential impact on prices before the trade is completed are also a factor.
In other markets, we are experiencing a clear behavioural change as evidenced by the higher trading activity across fixed-income products on our platform. For instance, the average daily volume (ADV) for US high-grade credit on Tradeweb rose by 71.5% year-on-year to US$3.7 billion in August. US and European government bond ADV was also up despite significantly lower rates volatility during the month.
That said, it looks like this year could be a turning point in the adoption of electronic trading in Asia too. The proportion of institutional investors active in electronic trading in Asia ex-Japan has steadily risen over the last decade – from just over 20% in 2011 to around 40% at the end of last year, according to Greenwich Associates. The acceleration in this long-term trend will be due to the combination of virus prevention measures that force people to work from home, and the volatility in regional markets.
The sudden emergence of the pandemic meant that both buyers and sellers quickly went from trading bonds in the office to doing the same job at home. How much of a bond trader’s functions can be transferred to a domestic environment? In principle, all of them. But in practice, it becomes clear that some trading channels are more efficient than others in a world of social distancing.
The work-from-home setting highlights the key difference between electronic and voice-based deals. From a trader’s perspective, they cannot lean over and chat to colleagues about pricing and liquidity in the market. And when the dealer is no longer at their desk, it becomes harder to coordinate the manual flows necessary for a trade to be completed. The result is patchier access to market intelligence, with potential flow-on effects on execution speed and price discovery.
Electronic trading, however, has proven that it can function even during prolonged periods of market stress. Traders can still simultaneously request quotes from multiple parties, choose to not to disclose the direction of their trade enquiry to minimize information leakage risks, and select the most competitive price. This entire process is recorded every step of the way, thereby helping them prove best execution.
Traders working remotely are also able to take advantage of alternative sources of information, replacing insight that might have come from a conversation with a team member with digital data. Artificial intelligence is also playing a growing role in informing traders on how they execute their strategies, and electronic trading venues are focused on optimizing data to help their customers trade more efficiently, reducing costs and risks at the same time.
The challenge now for electronic trading is to continue providing new areas of innovation as fixed-income markets in Asia move forward, while maintaining access to relationship-driven liquidity. But I am confident that the region’s trading community will not go back solely to relying on manual methods of conducting their business, now that they have experienced the benefits of electronic workflows. Looking ahead, advances in technology will continue to unlock new ways to trade for market participants in Asia, and electronic trading will be at the centre of this transformation.
Li Renn Tsai is managing director, head of Asia, at Tradeweb