Bond traders eye electronic shift

Bond traders are increasingly looking to electronic systems to execute their trades, according to market experts, with one vendor noting a tripling in activity.

Bond trading has lagged behind much of the financial services industry in electronic trading. The increase in interest comes in a period that saw reports of Goldman Sachs investing in e-trading technology, in a bid to reduce its reliance on desk-based traders alone.

Large banks are also carrying out much of their inter-dealer, private bond trading electronically, according to figures from MarketAxess, an electronic bond trading specialist. MarketAxess told analysts it had witnessed three times as much electronic bond trading in the first quarter, compared to a year ago, the Financial Times newspaper reported.

Such a move allows banks to shift more bonds off their books, and avoid related charges, the newspaper noted, while limiting risk under the Volcker rules, part of the Dodd-Frank Act created in the wake of the financial crisis.

Richard McVey, chief executive at MarketAxess, said the demand for electronic trading solutions in fixed income markets "is growing to address the liquidity challenges created by the new regulatory environment".

He added: "We continue to invest actively in technology solutions for bond and CDS trading in order to improve secondary market liquidity and efficiency."

McVey said the increase in interest was "directly related to the new regulatory capital requirements".

In March, figures from trade processing firm Omego showed an 85 percent jump in electronic processing in US wholesale funding markets, while there was a moderate growth in Europe where there is the highest level of automation.

David Hendler, banking analyst at CreditSights, recently told the FT that "Goldman Sachs and others are waiting for the final Volcker and derivatives rule making under Dodd-Frank" before they fully redesign their electronic bond trading.

"Banks and brokers need to incorporate a greater use of computerisation and technology in fixed income, similar to what the equities segments had to deal with [more than 10] years ago," he said.