Craig McLeod: Exploring the new frontiers of EM trading


Craig McLeodToday’s EM traders need more data, market access and broader liquidity than ever before to meet the investment profiles of their portfolios. Craig McLeod, Head of Emerging Markets at MarketAxess, discusses how electronic trading is evolving in response.

On 27th September, MarketAxess announced that it had become the third platform to partner with the China Foreign Exchange Trading System (CFETS) to provide global investors with trading access to the China interbank bond market. A milestone for us, and for our partners at CFETS and Bond Connect – whose drive to expand and diversify global investor participation in their $15tn onshore bond market is matched by the demand for those assets: overseas investor average daily volume reached around $7.2bn at the start of this year.

The opening up of the China bond market, and China’s inclusion in a number of leading EM fixed income indices, is an important chapter in the expansion story of emerging markets debt, and it’s one that’s firmly grounded in innovation and electronification. And so it got me thinking further about the ways in which electronic platforms are shaping EM trading.

Piecing together fragmented liquidity
Like most stories in fixed income, trading emerging markets is all about piecing together fragmented liquidity. The EM asset class has grown over 200% in a ten year period in which, at the same time, regulators have constrained bank balance sheets across the world. The result has been an increasing shift in inventory into regional and domestic investors and dealers, creating a more complex, more fragmented liquidity pool.

The inclusion in this picture of new frontier markets, with nascent and developing debt infrastructures and diverse and changing political and economic environments, makes the liquidity picture even more complex. While at the same time providing new opportunities for risk exposure and portfolio differentiation. EM traders therefore increasingly need an efficient way to understand the complexity, and to piece together the liquidity without pushing up operating & execution costs.

Saving costs, maintaining alpha
It’s possible to overuse the word ‘efficiency’, but in the context of trading EM, I doubt we will. It will always be important to save time, find fair prices and optimise execution cost. Clients are looking for more efficient ways to trade flows; to automate decision making and increase low-touch or no-touch trading; and to take advantage of increasingly equity-like liquidity pools and workflows.

EM clients have therefore helped to drive protocol innovation and data quality enhancements through fixed income trading, with electronic platforms developing rapidly in response to their needs. That drive is still accelerating.

‘E’ for innovation
Some of those E-trading developments have already seen widespread adoption across asset-classes and client types: portfolio trading, for instance, or automated RFQ. The former has had much coverage, and while it’s still only a small percentage of EM volumes traded globally across all platforms, we see it picking up in popularity across our clients as their index exposures broaden.

Other developments, though, are proving to be very EM-specific, yet driving increasingly large overall trading activity. Request-for-market (RFM) for instance, is the fastest growing trading protocol for EM debt that we’ve seen in the last 2 years; originally used for EM rates trading but now extended to credit. It gives traders a 2-way market through which to risk transfer large block orders electronically, while keeping their intended trading side discrete – meaning true, fair and competitive price formation together with execution efficiency.

Coming up fast on the rails alongside it is Switch trading – the ability to simultaneously buy and sell short and long durations in 28 local currencies. We’ve seen immediate momentum behind it since the second half of 2020, largely due to the time savings and price improvements it can provide. We’ve seen demand across all local EM markets.

Finally, there are developments that pair data depth with analytical intelligence, to help provide that extra edge. Tools that help traders to understand where their best execution options are, and who the best counterparties are to fulfil their liquidity needs. Here, we’ve started the journey with tools like Smart Dealer Select (it does what it says on the tin), but I think there is much more innovation to come.

All-to-all, all in one – what’s next?
In 2020, we were lucky enough to be voted by our clients as the world’s leading EM bond trading platform*. Of all the innovations that we and our competitors have delivered over the past few years, that vote pointed to one in particular – the application of all-to-all trading to global emerging markets.

No matter what the range of protocols or clever ways to trade, what matters more than anything is the depth and breadth of the liquidity pool. With more than 1600 clients now trading EM products across countries like Brazil, Mexico, Thailand, South Africa, India and many more, that’s what we’ve built. A local bank or buy-side firm in any one of those countries can trade EM debt with anyone in another, effectively democratising and centralising important global and local liquidity.

What comes next will, I hope, be more of the same. More local markets, increased data and price transparency across those markets, and a wider range of products and protocols with which, and through which, to trade.

Emerging markets are a complex and evolving segment for fixed income, presenting new frontiers for traders. But no matter where those frontiers appear, we’re keeping pace. n

*Source: Global Capital.

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