Future evolution of electronic trading in European bond markets

Bond market trading is going through unprecedented change today and will continue to do so over the next years. The traditional bond trading model, mostly reliant on market makers and voice broking, is being eroded. This is partly due to a natural evolution of bond trading, driven by technological progress and the strive for cost efficiencies, resulting in an increasing electronification of markets. The traditional trading model is, however, also being undermined by regulatory pressures which are reducing the capacity for broker-dealers to hold, finance or hedge trading positions, and thus provide liquidity as market makers. The upcoming implementation of Europe’s new trading rules under MiFID II will be another key component exacerbating the scale of the transformation. There are signs of the new market structure to come but no one can predict exactly how the secondary bond markets will look in 5, 7 or 10 years. We can only take an educated guess. What is certain is that bond trading must adapt and innovate in order to endure. This will involve all facets of trading including people, technology and a redirection of business strategy. The change will affect the entire market place: sell-sides and buy-sides, but also trading platforms and other trading technology providers. The bond trading ecosystem will see new (and possibly disruptive) entrants, innovative incumbents and adaptive trading protocols and venues. Although often referred to as an equitisation of fixed income, the changes will take a different shape from that of previous developments in equities given the structural differences between equity and fixed income trading. Overall, the transformation will be painful as regulation and technology are disrupting established market structures, presenting serious challenges for many industry participants. However, the transformation will also create opportunities through innovation for market participants.