Since the 1970s, equity markets have been on a protracted digital revolution. The pace of change has seen the market move like a tortoise, not a hare. These shifts have driven a race to the bottom for trading commissions, with the winners of this epic being equity investors, who now benefit from data-driven transparency and virtually friction-less trading.
Fixed income markets, however, are still in the early stages of their digitisation journey. Larger, more commoditised, and data-rich markets (like US Treasuries) are markedly more advanced than others, but the pace of change remains uncertain. While there is mounting evidence of rapid digital acceleration in certain fixed income markets, such as the US corporate bond market, this progress is not mirrored universally. Even in the more advanced examples, there remain significant challenges in collecting, rationalising, and leveraging data.
Firstly, there is increased competition for attractive investment opportunities; making it difficult for investment managers to find fixed income instruments of their choice. Unlike equity markets, fixed income markets are highly fragmented, covering a wide range of asset and borrower types, and lack uniformity. This reduces the incentive for investors to actively trade in the market. Why trade a scarce resource?
Secondly, markets remain relatively opaque, with sellers often facing significant transaction costs, especially in times of market crisis. These costs act as a direct disincentive to data sharing and trading; if you show your hand you get played.
The pace of change thus largely depends on solving these two problems. Fortunately, there are several exciting initiatives looking to solve these problems, for example promoting increased (1) institutional liquidity and (2) willingness to trade.
The first is part of a broader institutionalisation trend. The providers of capital are opportunistically supporting capital markets, capitalising on the same structural issues alluded to above. As capital flows to these opportunities, trading costs will likely reduce.
The second provides new opportunities or improved substitutes for existing investments, thus promoting market activity. These solutions are typically driven by trading intelligence or improved access to new assets.
Bond180 is a capital markets fintech, aiming to bring collective scale and intelligence to institutional fixed-income investors. We want to maximise the supply of fixed income investment opportunities by leveraging an informed demand network. Through our proprietary data analytics, we help investment managers strengthen their market engagement, using data amalgamation and anonymisation to better represent their portfolio needs in a compliant way.
As a capital markets fintech, we offer our clients the agility, independence, and flexibility required to get ahead of the curve. We believe that fixed income markets will change and those who embrace change will maintain a market-edge. Our mission is to help our clients win that race.
 In 2018, 80% of trades in this market were done on the phone. The shift since has been palpable, with $2bn more traded electronically per day now, but this still represents the significant minority of transactions. Gershon M. Distenfeld et al., ‘THE FUTURE OF FIXED INCOME: HOW TECHNOLOGY WILL REVOLUTIONIZE ASSET MANAGEMENT’ (Alliance Bernstein, October 2018), www.AllianceBernstein.com.