Automation Brings Greater Efficiency and New Opportunities

This article originally appeared in IMAS.org here.

Automation is a phenomenon that’s transforming fixed income markets globally, and the Asia Pacific (APAC) region is no exception. Adoption of rules-based trading has skyrocketed, and we have seen the number of customers across APAC using our Automated Intelligent Execution (AiEX) tool has grown fourfold compared to the number we had in 2020.

While asset managers have been early adopters, we are now seeing hedge funds, sovereign wealth funds, and other institutional market participants turn to automation. Efficiency is not the only driver, as changes in market structure and evolving traders’ strategies further encourage firms to embrace automation.

Advances in technology drive momentum

A simple reason for the increase in automation is the evolution of technology. We can do things now we simply couldn’t do 20 years ago, and the pace of new innovations keeps accelerating. For example, within our own business, basic connectivity to clients’ order management systems is now the standard. This makes for a faster and simpler transition to automation, which is the next evolution clients want. Automation not only allows for more efficient workflows, but also improves investors’ certainty and speed of execution, which can help offset risk.

This evolution of technology has particularly changed the conversation when it comes to automation of less liquid products. It is no longer a question of whether or not automation is possible, but what clients can automate next. In APAC participants have seen the success of automation in Australia and Japan with more efficient execution of government bonds. In Q1 2021 Australia and New Zealand government bonds (AUGV) AiEX accounted for 10% trades and in Q1 2024 it was 43% of trades. This has driven interest in further local markets automation, including trading in Chinese government bonds. 

Buy-side leads the way in Asia Pacific

In some areas of the world, the sell-side has led the way with automation. Within APAC, we’ve seen the reverse. The buy-side has pushed to automate in order to speed up execution, streamline workflow, and dedicate more time to transactions requiring high-level skills and hands-on expertise. They see the efficiencies gained by automation crucial to scaling their businesses.

The sell-side has responded by automating processes like auto-quoting. However, many sell-side participants in APAC have yet to fully capitalise on the benefits of automation. These benefits extend beyond more efficient trading processes to increasing attractiveness to buy-side participants who may systematically include certain sell-side participants in their AiEX enquiries based on their automation capabilities.  

Automation supports new and refined trading strategies

In addition to increasing efficiency, automation is revolutionising the trading landscape by enabling the adoption of new strategies and allowing improved execution of existing ones. For example, as asset managers increasingly automate their operations, they can rebalance portfolios more frequently. This leads to more accurate tracking of indexes for the end investor.

Hedge funds are particularly turning to automation for executing their systematic strategies and trading interest rate swaps. This gives them a competitive edge by allowing for faster execution and reduced frictional trading costs.

Traders are also using automation to put orders into the market when it’s most convenient or beneficial, which may be outside of local trading hours. For example, with AiEX’s time release function, APAC-based traders may choose to place orders for European government bonds or U.S. treasury bonds at the time of the respective market close.

Improved liquidity for traders and investors

While the origins of automated execution stem from the buy-side’s need to free up time for larger tickets, the next evolutionary stage of AiEX allows traders to focus on products that are not yet available to be traded electronically. And as more products are traded electronically, we expect to see better offset of risk, as well as improved liquidity and market efficiency.

Another advantage that has emerged from increased automation is the quality of the data it provides. We have seen first-hand with our clients how it has become easier to track dealer performance and to better analyse the full trade lifecycle, including transaction cost. The resulting insights allow them to make better decisions to drive the best possible outcomes for investors.

Growth in automation continues across APAC

While the APAC region embraced automation later than other world markets, it is now entrenched within trading strategies of institutional investors in the region. We have seen a number of sovereign wealth funds automating execution in their day-to-day strategies and interest surrounding the automation of both developed market and local market denominated currency interest rate swaps is also accelerating.

These and other areas of increased automation will only fuel the efficiency and competitiveness of players in the APAC marketplace. Now is the time for both buy-side and sell-side participants to get onboard and make the most of this opportunity.

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