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During the COVID-19 pandemic, electronic bond trading is on the rise across the world

With market transparency constantly increasing and the market making system improving, electronic trading is conducive to price discovery and market liquidity.  

In 2020, the sudden hit of Covid-19 has changed the norms of global bond trading. Traders are now working from home, and more transactions are taking place online.

“Before the pandemic, we were already seeing trading and workflows becoming electronic, COVID-19 has taken this trend even further,” said Lee Olesky, Founder and CEO of Tradeweb, an international electronic platform for bond trading said to Caixin.  “There are signs that COVID is changing the way bonds are traded. Traders had to trade from home when the pandemic first emerged, then in some places some people were able to return to the office. All this has obliged companies to seek and adopt new technologies to secure their transactions.”

According to Greenwich Consulting, in March 2020, electronic trading of US Treasury bonds reached an average daily record of USD540 billion, up by 25% YoY.  As a major global electronic platform for sovereign debt, Tradeweb had its most active month by daily trading volume in March, which was up by 41.5% YoY, reaching USD 1trillion.  

“Going forward, we expect to see this trend of electronic bond trading continue over the years to come.  And the scale is phenomenal.  In the global market of all assets combined,  Tradeweb’s average daily trading volume in the first half of 2020 only accounted for 12% of the global total of USD 6.8 trillion. This means electronic trading has huge growth potential,” said Mr. Olesky.

With its latecomer advantage, China’s onshore bond market has mostly realized electronic trading and registration except for the OTC part. On November 30, 2020, China’s Central Bank released the draft “Revisions on Interbank Bond Market Trading and Circulation Rules”, which proposes to establish direct links between China Central Depository and Clearing (CCDC), Shanghai Clearing House and the National Interbank Funding Centre, so as to electronically transmit bond trading and circulating information on the date of registry, to step up information efficiency for bond trading.

By comparison, the international bond market is relatively slow on this journey of going electronic. Despite the fact that electronic trading is considered to be more transparent and with more liquidity, old habits are hard to break. In the international bond market, a substantial portion of the transactions are still made over the phone.  Yet the impact of COVID-19 has highlighted the advantages of electronic trading.

According to data by Greenwich, in Asia ex-Japan, the market share of electronic trading has increased by 20 percentage points, from 20% in 2011 to 40% as of 2019. In the European market, 45% of fixed income trading in H1 2020 was done on electronic platforms – while this number was just 38% in 2019. Meantime, in the forex market that has an average daily trading volume of RMB 6.6 trillion, 90% of the spot trading is electronic.

“As a matter of fact, all bond transactions can be done electronically. With market transparency constantly increasing and the market making system improving, electronic trading is conducive to price discovery and market liquidity,” said Dayu Zhang, Executive Director at CITIC Securities and Head of China Business Development of CLSA (UK).  While investors are becoming increasingly aware of counterparty risks, the overseas electronic trading platforms act as a CCP with their all-to-all services, to mitigate counterparty risks for their investors and enhance transaction efficiency.

With a multi-tiered custody system taking root in China, foreign institutions enjoy direct access into China’s bond market, due to the convenience of Bond Connect. “We see China’s fixed income market as one that is opening up to the world. This offers substantial opportunities to international investors, in particular, to real-money accounts,” said Mr. Olesky in his interview with Caixin.

According to Mr. Olesky, most of Tradeweb’s clients are big institutions seeking various assets in the global market. Usually, such institutional investors are well received in emerging markets such as China, and would invest in large amounts of emerging market assets.  For some of these institutions, the decision to invest in China is now largely driven by the rationale that China’s bonds are included in some major international bond indices.  To track these indices, fund managers have to buy China’s government bonds.

In the meantime, Tradeweb and Bloomberg, both being major electronic trading platforms, have launched request-for-quote (RFQ) services with CFETS (China Foreign Exchange Trade System) and the National Interbank Funding Centre.  This has enabled foreign investors to have direct access to China’s interbank bond market via either platform. To further facilitate this process, Tradeweb has optimized its API portal to link Bond Connect and CIBM Direct, so that investors can switch between two investing channels to China’s onshore bond market on one computer screen. At the same time, both services have been integrated in other Tradeweb services, making trading in China’s bond market as convenient as in other regional markets.

The above article was published on the Caixin website on Dec 23, 2020.

The original can be found via the following link: