The fixed income market has historically been considered opaque. Lacking a centralized, physical market or an organized exchange, fixed income has traditionally depended on relationships between dealers (e.g., securities houses, large banks) and their clients. But the introduction of electronic trading has changed this landscape dramatically.
This matters to investors in several important ways:
Improved matches between buyers and sellers, facilitated by electronic trading, lead to lower costs to access liquidity.
More data and better liquidity create more opportunity for data-based players to quickly squeeze out mis-pricings.
This improved market efficiency will in turn pressure excess return opportunities. Beta decisions — not security selection — are increasingly likely to drive fundamentally-based excess returns.
The bottom line: The pandemic has accelerated the trend toward electronic bond trading. As fixed income markets begin to resemble highly efficient, information-rich equities exchange-trading platforms, new opportunities will open up for both indexing and data-driven, systematic approaches to thrive.
Go deeper to learn more about key developments in electronic trading for fixed income, and what they may mean for you.
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