Fixed Income Focus | Robert Hammond


trading practices supported by standards such as FIX. MiFID II in Europe is looking to achieve additional pre-trade transparency in the fixed income markets (both bonds and swaps), with results that are expected to be similar to the Dodd-Frank Act in the USA.


The future


The work of FPL won’t stop here. FPL is continuing to update the FIX guidelines in-line with the evolving regulatory environment, ensuring that market participants can use FIX to meet their business needs. Additionally, the guidelines themselves are being extended to cover some of the less common workflows such as different permutations of cross-asset trades within fixed income. For example, common strategies such as basis trades and butterflies are now being incorporated into the guidelines. Finally, FPL has just launched a new initiative which has come about due to the trading element of fixed income becoming more electronic and market participants expressing a desire to automate additional elements of the trading process. A prime example of this is the administration that currently takes place to grant permission for a trading relationship to occur on an electronic trading venue. As each trading relationship will need to be validated on ‘day one’ of the new SEFs going live, this is an initiative that could present significant efficiency savings for these markets. ■


Best Execution | Spring 2013


make markets in credit. Both of these regulations are having an impact on liquidity in the OTC (over the counter) rate and OTC credit markets. In addition, the implementation of central clearing is requiring market participants to closely review their trading work-flow.


What is the current state of market liquidity?


In the fixed income and credit markets there are many different types of bonds with very different levels of liquidity. One indicator of market liquidity is the US Federal Reserve numbers for US dealer Inventories. From the peak of liquidity in late 2007, dealer inventories are currently running at around 20%-25% of what they were pre-crisis. Overall dealer liquidity has remained pretty static of late. One reason for this is that some incoming regulations are inhibiting the market. The Volcker Rule, for example, seeks to limit proprietary trading. The Basel III capital requirements limit the ability of banks to hold risk-weighted assets and


What trends are we seeing in terms of trade size? It’s very difficult to generalize about the market, since there is very little public data available in Europe, but we do think there is a trend towards smaller trade sizes, with fund managers often breaking larger orders into smaller sizes in order to transact electronically. Typically in the US credit market, where data is available, close to 20% of US high-grade corporate bond volume is executed electronically versus around 80% via the telephone. While dealers enjoy using electronic trading, they still have a preference for doing the large ticket sizes by telephone. We handle the vast majority of those electronic trades in the US and expect the percentage to continue growing.


51 Tapping liquidity


Robert Hammond, Head of Client Sales and Dealer Relations Europe at MarketAxess, discusses with Best Execution new protocols to meet the liquidity gap in the fixed income market.


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