Treasuries and short-term investments still make up the bulk of electronic fixed-income trading volume, but other areas of the bond market are starting to gain ground, according to a recent report by Greenwich Associates. "[We've seen] demand for on-line trading increase in high-grade corporate bonds, agencies and mortgage-backed securities," said an official at Greenwich.
On-line trading volume of investment-grade bonds rose from $88 billion in 2004 to $102 billion in 2005. The official noted that around 40% of investors have interest in electronically trading emerging market bonds, 10% have interest in IR derivatives and 3% have interest in e-trading for credit derivatives. This year is the first that these three markets have been mentioned as electronic trading candidates.
The report shows that the volume of electronic trades is continuing to grow well past the initial application of the technology, and 2005 was the most active year yet. Currently, 58% of all U.S. investors trade on-line. "The proportion of investors not [even] considering on-line trading is only around 30%," the official said. The total volume of U.S. fixed income trades is more than one-third of the total amount of all U.S. fixed-income trades, at 38%. The total amount of electronic fixed income trading in United States is $6.93 trillion, as of October.
"There is a lot of very interesting things to look at in e-trading these days," one trader noted. "Trading corporate and agency bonds on-line is a plus, but I think it's going to be a while before we see significant movement in those bonds being traded electronically," he explained. "If the markets co-operate we might see some movement, but it will take a bit of time."
In 2005, the amount of trades executed electronically increased by more than 20% from 2004. This year was the third straight year that the volume of electronic trades increased. The greatest increase in e-trading has occurred with the most active of investors. "By type of institution, demand is highest among fund managers, but increased last year among banks," the official explained.
Although the amount of electronic bond trades has increased for the third straight year, hybrid trades are still fairly common. With a hybrid trade, the amount of the trading volume is pre-negotiated over the telephone before the trade is executed on-line. The proportion of hybrid trades varies from as low as 6% in the more established U.S. Treasury trades, to as high as 20% in MBS trades.
In a survey of 725 investors, 211 of them traded volumes of under $1 billion, 219 traded volumes of $1-10 billion, 85 traded in the $10-50 billion range and only 26 traded volumes of over $50 billion exclusively on-line. Over 86% of investors use multi-bank or third party systems only and only 2% use the single bank system only. The remaining 10% use both systems.