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Fixed income trading primed for evolutionary leap

The growth of electronic trading in fixed income has always been driven by efficiency, but we’ll begin to see data science and analytics fuel new levels of smart trading this year.

Marketplaces such as Tradeweb have spent the last 15 to 20 years building out infrastructure to digitise these businesses and organise their trading activity through more streamlined workflows and trading protocols.

Yet, even now, a significant portion of trading activity still takes place over the telephone or chat messaging. In reality the industry relies on a large and diverse network of market participants, helping to facilitate institutional, retail and wholesale trading of fixed income and derivatives.

This means there is still an imbalance between the majority of investors trading online and the proportion of business, or volume, that they execute electronically.

Platforms have centralised market participants, and technology has enhanced how they interact and process trades; but the future of electronic markets will infuse big trading data to inform these systems and make them even more intelligent, efficient and effective.

Terms like “intelligent execution” will come to define the integration of data science with fixed income marketplaces, with more sophisticated trading technology to identify counterparties, discover market liquidity and execute trades effectively across a range of market structures.

Now that trading venues can access liquidity across asset classes, we will be able to integrate machine learning to make trading smarter, and automate processes to streamline price discovery and operational efficiency.

Where the major benefit of electronic trading once focused on reducing inefficiencies in trading, the technology can now yield valuable data that can better inform how institutional investors transact.

For example, centralised hubs — which include Tradeweb and others — will allow market participants to see inventories, axes, runs and streams in one place. Data will help them choose from a complete spectrum of trading protocols to get their trade done with the right balance of immediacy and information disclosure — ranging from electronic processing of discreetly-negotiated trades to anonymous trading with all types of counterparties.

Integrating order and risk management systems with trading platforms will leverage intelligence throughout the entire workflow, including post-trade, where data will become better organised into more meaningful transaction cost analysis, risk management and compliance. Traders will also be able to use this data to help automate some trades too.

These are all signals that the fixed income industry is primed for an evolutionary leap in electronic trading, and 2017 will bring meaningful strides towards more fully integrated and intelligent workflows for the trading community.

Intelligent execution will come to characterise new technology that helps suggest, and in time, manage more trading activity across electronic platforms.

This will enable human traders to focus on more complicated trades, and improve their ability to navigate the marketplace with more information. Increased regulation will accelerate this process, as market participants will need to comply with reform and to remain competitive.

Lee Olesky is chief executive of Tradeweb Markets, an electronic venue for over-the-counter markets

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