Buy Side Cuts Back on E-bond Trading in Europe
February 16, 2009
European market participants did less of their fixed-income trading electronically last year than in 2007, according to a survey by the Securities Industry & Financial Markets Association (Sifma).
Fifty percent of buy-side respondents said they conducted more than 60 percent of their fixed-income trades electronically, down from 60 percent in 2007. Mark Austen, managing director of Sifma in Europe, noted that the annual survey had previously shown e-trading increases of a few percentage points each year.
"When liquidity is constrained," said Austin, "I think people want to trade by voice rather than electronically, because electronic trading is more transparent and reveals your position more." The 2008 results were a blip rather than the beginning of a trend, asserted Austen, who expects electronic trading to resume its upward trajectory over the next couple years.
Sixty-four buy-side investors, 13 sell-side firms and five trading platforms participated in the survey, conducted in November and January. Those numbers were down significantly from last year--147 buy-side and 15 sell-side participants--which Sifma attributed to many firms being too busy with the financial crisis to respond.
Another big change in 2008 was the buy side's increasing application of a single-dealer approach--versus a request-for-quote (RFQ) model--particularly for instruments like interest rate swaps and credit default swaps. In the past, said Austen, the buy side would often put out an RFQ and negotiate with multiple dealers for the best price. "In a good, deep, liquid market, when credit is easily available, the winner's curse worked against the sell side," he said. "The buy side would give an order and put five dealers in competition. One dealer would win and then the market would move against that dealer because it knew he was sitting long or short on that bond."
Now, added Austen, the dealers are not as aggressive, meaning that a buy-side order may not get filled, or get a partial fill, before the market moves against the exposed position. This dynamic is not commonly understood, according to Austen. Regulators want more and more transparency, he said, but transparency isn't always beneficial to the buy side.
The number of buy-side respondents who expect to be able to use a single platform for all their wholesale electronic trading needs in the "near future" fell from about 85 percent in previous years to 31 percent. Before the crisis, said Austin, market participants thought they would see one or two winners emerge from the group of e-trading platforms. Competition between the leaders would keep prices down and buy-side firms would gain efficiency by directing their business solely through a TradeWeb or Bloomberg. But with tight markets, the buy side is turning to dealers to ensure they get their orders filled.
Depth of liquidity was cited by 39 percent of the sell side and 37 percent of the buy side as the most important factor in choosing an electronic platform. For buy-side firms, speed of execution followed, with 22 percent; 20 percent of sell-side participants said range of products was most critical.
Eighty percent of those surveyed expect a "prolonged" period of volatility, versus 50 percent in the 2007 survey.
