Electronic bond trading has reached tipping point, says MarketAxess

Christophe Roupie

For many years, there was scepticism about whether trading in the behemoth global bond markets, with their products of varying maturities, structures and liquidity levels, could ever be electronified to a significant extent. But for Christophe Roupie, head of Europe, the Middle East and Africa (EMEA) and Asia-Pacific for MarketAxess, one of the world’s leading electronic marketplaces for fixed income trading, meaningful change is happening and he believes it will only continue to speed up.

“Bond markets are very large and very complex,” he says. “That means that the pace of change within them can appear to be slow even when it isn’t. The evolution may seem less dramatic than in, for instance, equities or futures markets, but the volume of electronic bond trading continues to grow.”

He believes the benefits of this kind of trading are clear, including cost efficiency as well as being able to tap into huge amounts of market data. “Electronification and broad innovation within bond markets has helped to create billions of data points,” he says. “And these points of reference are used by investors and dealers to improve liquidity, pricing and execution.”

Accelerating trends

One of the often-discussed themes of the Covid-19 pandemic is how it has accelerated existing trends; this appears to be the case be with electronic bond trading.

More than $2.6tn worth of credit trading was executed via MarketAxess in 2020, compared to just over $2tn in 2019 — an increase of 29%. While 2020 was clearly an exceptional year in many respects, it is hard to write off an increase of that size as solely being down to unusual conditions. Volumes on the platform were already increasing prior to 2020, with a 22% year-on-year increase between 2018 and 2019, and a 18% increase in trading volumes between 2017 and 2018.

Mr Roupie comments: “I think 2020 has really shown how electronic trading platforms can provide an efficient, liquid and resilient marketplace. We posted record volumes and record market share gains across all of our core products at various points in the year. But what I am probably the most pleased about is how quickly and effectively we responded to the crisis. The resiliency of our systems and expertise of our people, allowed clients to very swiftly connect to our platforms from home and alternative locations.”

People may also point out that at the height of volatility and disruption in March 2020, across the bond markets as a whole, there was a substantive increase in voice trading relative to electronic activity, as well as suspensions of algorithmic trading due to the level of market volatility.

However, while Mr Roupie acknowledges there was “some disruption” during that first quarter of 2020, across the year he believes markets proved their mettle. He contrasts the events of 2020 with what happened in the global financial crisis (GFC) when markets shut down and traditional liquidity provision took a major hit. And although banks played a key role in providing liquidity and keeping markets moving during 2020, he believes alternative providers of liquidity were also able to step up, such as via all-to-all trading platforms (a trading protocol where a wide range of buyers and sellers can connect directly and anonymously, rather than via the more traditional dealer-to-client disclosed model).

On Open Trading, MarketAxess’s all-to-all platform, levels of trading increased by 63% year-on-year in the last quarter of 2020, with volume of $218bn. “The impact of the pandemic and the crisis the markets went through clearly acted as an accelerant in behavioural changes. If you look how much volume, globally, has moved to Open Trading — over a third of our volume is now executed this way, which is testament to those changing behaviours,” says Mr Roupie.

Becoming a major player

Taking a step back, it is clear that MarketAxess can legitimately claim to be a major player within bond trading. The company estimates that its platforms supported 22.8% of trading in US investment grade bonds and 17.1% of trading in US high-yield bonds in the fourth quarter of 2020.

While this has not been an overnight achievement, it has happened relatively quickly. Richard McVey, chairman and chief executive of MarketAxess, started the platform in New York in 2000. In a 2019 profile piece, Mr McVey told the Wall Street Journal “we had three or four near-death experiences early on where revenue growth was not what we wanted”.

Although the platform was profitable by the time it went public in 2004, it began making serious headway after the GFC. The platform, which began life as a multi-dealer service, connecting dealers to corporate bond investors, has since introduced multiple new products and innovations, such as Open Trading. It has also broadened the range of securities it covers to include areas such as high-yield, emerging markets, municipal bonds, loans and US Treasuries.

Since 2020, it has been possible for investors to identify and trade green bonds on the platform. This development was launched alongside a partnership with charity One Tree Planted, where for every $1m of green bonds traded on the platform, five trees have been donated to projects in New Zealand, the Andes, India, Papua New Guinea and British Columbia. Mr Roupie says that MarketAxess planted more than 134,000 trees in 2020. “Environmental, social and governance principles are becoming ever more core to our company and brand,” says Mr Roupie, who also emphasises that the firm’s culture has “equity, diversity, inclusion and community at its heart”.

The platform has also been pioneering automated trading execution technology, from workflow automation to price quotation, with initiatives including the enhancement of its automation suite, Auto-X. Mr Roupie expects to see further adoption of this technology as a growing pool of users have become comfortable with the core premise of electronic trading, and will be attracted to make further efficiency gains by automating more of their activity. He says: “In hopefully less stormy or turbulent waters in 2021, we expect more adoption of automation technologies and low-touch or no-touch workflows, from both dealers and investors.”

Indeed, when asked to describe MarketAxess in a nutshell, Mr Roupie puts technology front and centre. MarketAxess, he says, is a “fast-growing” and “innovative” global financial technology company. “We’ve been described as the Netflix of bonds, and we do like the comparison,” he says, with a glint in his eye. “We want to make fixed income markets more liquid, more transparent and efficient, and easier to trade.”

Mr Roupie puts the organisation’s continuous drive for innovation down to two main factors. First, that the business is built around client needs — “We really keep on top of our clients’ requirements, and we always innovate off the back of that”; and second, that the business’s relatively flat and agile structure allows decisions to be taken quickly and cultivates an environment for effective communication between staff.

Global ambitions

Although MarketAxess was started in the US, and those markets were its initial area of focus, EMEA and Asia-Pacific are also central to its growth ambitions for the future. Mr Roupie acknowledges that Asian markets and, to a lesser extent, Europe have been slower adopters of electronic trading, but he is very optimistic about the direction of travel. With the September 2020 hiring of Riad Chowdhury, former head of global execution services for Asia at Standard Chartered, as the new head of Asia-Pacific, the company’s growth ambitions for the region will get a boost. Mr Roupie says: “We’ll be creating a more comprehensive trading and data offering for emerging and frontier markets across the region. We have high expectations for Asia and this appointment is going to be helping us along.”

In addition, in early January the company announced that Raj Paranandi, former global co-head of digital transformation for UBS Global Markets, would be joining in March as chief operating officer for EMEA and Asia-Pacific. He will have day-to-day operational oversight for those regions, including technology and product development.

On the European side, where operations are longer established, the business is still growing and includes new acquisitions. For instance, in September 2020, MarketAxess acquired Deutsche Börse Group’s Regulatory Reporting Hub, allowing it to expand its trade and transaction reporting offering in the region, with the idea being that MarketAxess can provide new and existing clients with broader and deeper end-to-end data and trade lifecycle services.

Along similar lines, Mr Roupie also raises its Axess IQ offering, which has been live with several private banking clients in the region since the end of 2019, and is being expanded to the US and Asia-Pacific. The product, which rolls together multiple MarketAxess trading protocols, such as Open Trading, with comprehensive data and automation tools, provides private banking and wealth management firms with an integrated order and execution workflow system.

For Mr Roupie, the future really is all about continuing a drive for integrated, efficient and intelligent trading execution and strategy. “I think we’ll see more automation, more use of machine learning, more system integration, more data, more analytics and much more innovation,” he says. He adds that he expects “investment and execution strategy will become even more correlated” and that “fund managers will be turning to the trading desk in search of information and ideas for alpha generation, and I think that’s going to be a massive change as we move forward into new regions, new products including our rates offering and grow our user network more globally.”