Fixed Income Focus | Robert Hammond
“The European fixed income market exhibits a different market convention to the US where trading is undertaken on a spread trading basis, as opposed to a predominantly price-based protocol in Europe.”
How is electronic trading filling the liquidity gap? There are a couple of key ways in which electronic trading can help drive liquidity. First, as far as MarketAxess is concerned, we’ve expanded the dealer participation on the platform by adding a broader group of regional and specialist dealers, providing investors with a much larger pool of counterparties to trade with.
The second thing we’ve done is to bring buy-side counterparties together, when there is no suitable dealer price available, through MarketAxess’ Open Trading. In addition to the normal client-to-dealer RFQ (Request For Quote) transaction model, Open Trading allows our investor clients to trade
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directly with other investors. This is helping to increasing liquidity by further broadening the number of potential trading counterparties.
Our dealer pool in Europe comprises 26 banks who are both quoting live, streaming prices on the platform through our click-to-trade (CTT) protocol, and are prepared to respond to client RFQs. In the US, our dealer pool comprises around 80 banks.
Our Open Trading protocol works in the following way: if a clients send an RFQ to a bank but cannot find an offer, they can then choose to send their request, anonymously, into the Market Lists order book where other investors can see and respond to that order. This
may result in a transaction with another client. Currently we offer the Market Lists protocol for all of our US and emerging market products, and we are finalizing the development of the same system in Europe. In Q1 2012, when we started offering clients the option to make their order requests visible to other clients, some 15% of the orders were being placed into the Market Lists order book. By the end of 2012 this had reached around 65%, and this year, on average, over 70% of client orders are being opened up to other investors on the platform.
Is the traditional trading model working in fixed income trading? In order to demonstrate best execution, market participants must call at least three dealers. However, most clients typically want to call more than three, as one cannot guarantee that
Best Execution | Spring 2013
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