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Automated execution transforming Asian bond markets

APAC buy-sides are trading more types of instruments electronically, leading to deeper automation.



Andrea Sbalchiero, Tradeweb

Buy-side fixed income and currency desks in Asia Pacific are fast catching up with other regions and other asset classes in their use of electronic execution when transferring risk.

For years, fixed income lagged equities in its ability to engage “low-touch” trading strategies. And among global institutions, Asia Pacific markets have traditionally been slower to go electronic due to fragmentation and a lack of regulatory impetus compared to counterparts in North America and Europe, where trading mandates accelerated the adoption of digital workflows.

That is now changing, thanks to increasing regulation, better technologies, a growing demand among both global and local firms to access local currency instruments – and the COVID-19 pandemic.

Going low-touch

Andrea Sbalchiero, head of Asia rates at Tradeweb in Singapore, believes the pandemic helped drive digital adoption. “With so many people working from home, they couldn’t use the same screen real estate they had in the office, and required flexible and reliable solutions for trading.”

Laurent Bilard, Hong Kong-based head of fixed income trading for Asia at Fidelity International, agrees: “Covid amplified the importance of electronic trading. When we were working at home, it was easier to log into a venue than to call a sales trader.”

Digital marketplaces such as Tradeweb used this behavioral shift to further expand into the region, both in terms of product coverage and people on the ground.

That move supports a growing selection of instruments available for institutional investors to trade electronically, be they hedge funds, long-only funds, or asset owners such as sovereign wealth funds, insurers, and pension funds.

Expanding the APAC product menu

Three years ago, Tradeweb boosted its interest rate swaps offering with the addition of emerging markets currencies, and the service was initially used in Asia Pacific mainly by global dealers. In response to client demand, the platform also strengthened its position in Australian and New Zealand dollar pairs by increasing its product and protocol scope, such as the launch of EFP for bonds and swaps.

More recently it has rolled out its rules-based automated intelligent execution tool, or AiEX, locally to help APAC traders fully automate tickets of varying sizes and complexities.

“Automation allows our customers to focus on the transactions they can add most value to, but also to conduct more systematic types of trading,” said Laurent Ischi, Tradeweb’s director of AiEX and workflow solutions for Asia Pacific. “It’s early days in the region, but we are seeing local institutions use AiEX to implement new strategies tailored around APAC market themes for execution.”

Massive market opportunity

The potential scale for automating fixed income trading in APAC is huge. Bond issuance has grown from $107 billion in 2006 to $614 billion in 2021, according to the International Capital Markets Association.

Chinese government bonds represent a vast new source of issuance. The renminbi-denominated Chinese bond market reached Rmb123 trillion ($18.4 trillion) in June 2022, according to Asia Bonds Online. Although much of that remains difficult for global investors to access, the inclusion of Chinese Government Bonds in the FTSE Russell World Government Bond Index should result in up to $158 billion of international allocations to Chinese onshore debt.

More issuance translates into more trading. Until recently, however, this huge market has been largely voice-traded with the exception of Northbound Bond Connect, which embraced electronic execution right from the start when launched in 2017.

Adopting electronic workflows

Market architecture is one reason for the endurance of manual workflows. Bonds don’t trade on a centralized, transparent exchange as equities do. They remain a relationship-driven over-the-counter asset class, where banks are the main warehouses of fixed income securities.

But technology is now more sophisticated, and many Asian fixed income market participants are gradually becoming more comfortable with supporting electronic trading.

“The challenge has been to transform old habits,” said Sbalchiero. “It’s been too easy for buy-side firms to rely on relationships with liquidity providers they’ve known for years. Dealers are building their technology infrastructure, so the price they can get electronically is increasingly the best one available.”

FIL’s Bilard, citing the example of Korea’s government bonds, said, “Despite this market being liquid, it has always been voice-traded. Buy-side investors are now trading this electronically because it helps us become more efficient, reduce our operational risk, and find scalability.”

Snowball effect

The ‘changing habits’ that Sbalchiero referenced means trading desks are now better able to understand the protocols of electronic execution, and to know when to use them over voice.

Progress creates its own momentum. Tradeweb, for example, now enables pairs trading across many Asian currencies, from developed markets, such as Singapore, to emerging markets with less liquidity, such as Thailand. It’s just following client demand, says Sbalchiero: “This creates a snowball effect.”

But more firms are adding resources, both in terms of investment and people, to integrate new electronic capabilities. Buy-side clients are likely to experiment with the more liquid currencies, trading small clips at first; but once they realise the benefits of electronic processing and automation, they quickly ramp up, freeing dealers to focus on more sophisticated products or business relationships.

Tradeweb began with interest rate derivatives in the cleared currencies, because they are liquid and spot markets are simple. It also supports trading bonds in APAC too, after first building a marketplace for Japanese Government Bonds in 2005.

Real-money (i.e. long-term institutional) investors are eager to go electronic with cash bonds, and both credit default and interest rate swaps. Meanwhile, hedge funds are going electronic for interest rate swaps and government bonds. These two types of clients apply different degrees of automation to their execution workflow, ranging from low to no touch.

Data decides

By using automated execution solutions such as AiEX, dealers can initiate trades simply by sending Tradeweb a FIX message instead of manually inputting an order’s specifics. AiEX pulls in multiple sources of historical and live data to provide analytics, such as transaction cost analysis, and complete trades if all pre-programmed parameters are met.

“Data drives everything,” said Bilard. Pre-trade data is used to gauge what commissions to pay the sell-side, while streaming data helps with price discovery and minimises information leakage. “The key is to have data plugged directly into our OMS [order management system]. This makes it a game changer.”

Despite rising volatility in Asian fixed income markets, buy-side traders are still keen to use automation solutions because the data is a new source of value. Where there is liquidity, the technology will follow, and behaviors will change.

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