Emerging Markets Find Liquidity Lifeline in Electronic Trading

The perfect storm of a global pandemic and an energy price war pushed emerging market fixed income and derivatives markets to the brink in March. As the spread of novel coronavirus and ongoing oil price war between Russia and Saudi Arabia sparked a flight to safety, credit default swap spreads (CDS) more than tripled in some markets. The massive spike in volatility, which was felt around the world, was most pronounced in Asia, Latin America and EMEA.

These markets, which were already under pressure before the crisis, were being put to the test like never before.

Global Access Creates Opportunities

But, instead of collapsing under the pressure, emerging markets trading desks have stayed in the game throughout the crisis, offering a critical source of liquidity for market participants around the world as this unprecedented situation continues to unfold.

Two factors have made that possible: the worldwide spread of the pandemic, which has upended traditional notions of safe-haven markets and forced market participants to think truly globally about diversification and risk exposure, and the growth of electronic trading, which was gaining rapid momentum in emerging markets in the run-up to COVID-19.

The phenomenon is best illustrated in the interest rate swaps market. Following the path taken in more established G10 currency markets, many emerging markets interest rate swaps trades started to migrate to electronic trading earlier this year. The move made obvious sense from an efficiency perspective. In a world where the vast majority of developed market swaps were already being traded electronically, the idea of picking up the phone to find the other side of a trade for an emerging markets swap was making less sense from a workflow perspective. It also perpetuated an unnecessarily insular environment where many emerging markets were isolated from developed markets and each other.

All of that changed with the introduction of electronic trading. The first quarter of this year, for example, Tradeweb was up over 65% vs. Q4 ’19 with much of that activity from clients trading across regions and/or currencies.  Beyond the overall trade volume, the total number of clients trading in these markets had also increased significantly, which would become incredibly important as the COVID-19 crisis started to grow.

Liquidity for EM Interest Rate Swaps

All of the efficiency gains associated with electronic trading have of course been magnified in the current crisis. With much of the sell-side liquidity coming from the world’s largest banks, the ability to execute trades efficiently while seamlessly managing emerging market risk across global currencies has been a key to maintaining access to liquidity in these markets. Add the fact that nearly all of this activity has shifted to work-from-home operations and the workflow advantages of electronic trading become impossible to ignore.

“The ability to give our clients seamless access to emerging market risk across several different asset currencies has been critical during the COVID-19 crisis. Access to liquidity and global connectivity could easily have been compromised if we were solely reliant on legacy, trading protocols, but that didn’t happen. Thanks to the growth of electronic trading in emerging markets, our clients had flexibility in access to emerging market risk, which was critical to their investment strategies.   We have seen that electronic trading channels offer valuable source of liquidity during volatile markets,” said Scott Wacker, Head of E-Commerce Sales, J.P. Morgan.

The Road Ahead

As the world starts to climb out of the COVID-19 crisis, more widespread adoption of electronic trading will only grow.

Tradeweb CEO Lee Olesky recently commented on the far-reaching impacts he sees the COVID-19 experience having on the future growth of remote operations: “We are going to be in a new environment, and we now know we can function in many businesses — not all for sure — but in many businesses remotely," he said. "I think that is a fundamental game-changer when it comes to the business impact here and the personal impact."

Widespread, global access to electronic trading platforms has played a central role in making that future possible, while also ensuring that efficiency, consistency and regulatory best practices are maintained regardless of region or asset class.

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