What’s holding back electronic fixed income trading in Asia?

12 Oct 2017 by Monica Uttam

IS ELECTRONIC fixed income trading undergoing a resurgence in Asia? Tradeweb Market’s coup in June 2017 to become the first offshore electronic bond trading platform to provide offshore investors access to China’s US$9 trillion bond market via Bond Connect has certainly heightened excitement. But gaining a share in markets that face thin liquidity and long-held practices will remain an uphill struggle.

There is no shortage of platforms stepping up to the challenge. The region’s dominant provider, Bloomberg, has yet to follow its rival and build a link to the China Foreign Exchange Trade System (CFETS), the access point of Bond Connect. Domestic rivals such as onshore data provider Wind Information may also be trying to enter the space: “You can’t rule out that they [Wind Information] are trying to get into the trading space,” says one industry veteran.

For the most part, investors are skeptical about the progress that these platforms can make. “To be honest, the usage in China is still very much on an OTC (over the counter) format aside from some of the exchange-traded products,” says one portfolio manager based in Hong Kong. Compared to the more developed bond markets such as Europe and the US, progress in electronic trading in the region as a whole has been slow. The importance of relationships and the lack of liquidity are the main factors holding investors back from the electronic route.

Data from Asset Benchmark Research’s (ABR) Asian G3 Bond Benchmark Review conducted in late 2016 illustrates that the uptake of e-trading in the region is limited. Most of the investors that were surveyed were not trading electronically for dollar-denominated Asian bonds (52%). The reasons for their reluctance was the preference for human contact, insufficient liquidity and an inability to negotiate prices or trade in bigger ticket sizes.

Voice is still the predominant mode of trading as investors don’t want to ‘show their hand’ by putting bids online. They also get better market colour through a salesperson. “The way Asian clients work is that they are little bit more defensive in terms of what they want to do; it’s more of a fundamental business issue because of the lack of liquidity,” explains EK Ong a former credit trader who now runs his own fintech, Bondlinc. “The relationship and reputational angle is very important in Asia.” The platforms in the region have adopted the ‘request for quote’ (RFQ) model given the significance of this human touch where clients can request price quotes on a particular order size from different dealers the way they would by phone.

Philipp Sterner who heads sales for MarketAxess in the region says his shop is using the RFQ model to differentiate themselves. “We try to replicate that negotiation that you have when you are on the chat or on the phone with your sales cover. Prices come back and you can counter and ask for price improvement,” he explains. The investors can also choose how many dealers they go to.

He makes the case that their platform is not trying to change the mixture of voice and electronic trading that currently exists. “We’re not taking anything away from the conversation. Salespeople have free access to the platform and appreciate having a tool that answers the question, ‘What did my client inquire for’?”

However, fund managers are vocal about the lack of innovation among platforms that have demonstrated success in other markets. “If you’re moving people away from their traditional method of trading, your platform should demonstrate a better capability in terms of efficiency, straight-through-processing etc. Right now, these new platforms have huge room to bring in local elements to fit the need,” says Freddy Wong, a portfolio manager at Fidelity International based in Shanghai.

Additionally, over the past five years, the Asian fixed income landscape has changed drastically with onshore investors becoming more and more relevant. Many have concerns over the costs of adopting new overseas e-trading platforms and the ease of incorporating them into their existing operations. To win them over investors suggest starting small, for example, by offering Chinese language on the platform to cater to the audience.

With regulatory developments in Europe such as the MiFID II directive coming into effect next year, fund houses will also need to prove best execution through transaction cost analysis (TCA). This requirement will promote the use of those electronic trading platforms that have already incorporated TCA into their existing functionality among asset managers in Europe and will almost certainly trickle down into their Asian operations.

When asked about the proliferation of new electronic trading venues, Ee Chuan Ng, head of Bloomberg China is sanguine. “This is a positive market evolution as more centralized, regulated venues offer greater investor protection and enable local markets across Asia to enhance transparency and efficiency.”