Hong Kong — A latecomer to electronic bond
trading, Asia is now catching up to the rest of the world as falling
trading volumes and increased regulatory requirements put the squeeze on
bank trading desks, even as new issues soar to record highs.
Nearly half of Asian dollar-denominated corporate debt is now traded
electronically on platforms offered by major banks and other market
participants, from nothing four years ago.
While
there will always be a need for experienced hands as Asian bond markets
deepen, the shift to electronic trading will further rationalize an
already concentrated market – the top 6 firms control more than half of
global fixed income turnover – as second-tier players exit or pare back
operations.
JP Morgan, a top-tier bond trading
house, is a case in point. Shankar Hari, head of fixed-income
structuring & FX products, Asia ex-Japan says while the bank has
"incrementally added traders and sales people," the focus is on its
electronic trading platform.
"We realize this is
the only way forward and with the new regulations coming, we should be
in a position to increase market share," Hari said.
The push to e-trading efficiency ahead of hiring more traders is driven
by a harsh reality: Deutsche Bank says global investment banking
revenue will fall to $240 billion this year, down by a third from 2009.
It's not that the supply of bonds is drying up – Asian issuers have
sold nearly $132 billion in international markets so far this year, a
record that dwarfs the $76 billion issued in 2011.
But as big bond investors such as pension funds and insurers have grown
increasingly worried about counterparty and market risks, they have
hoarded their securities rather than loaning them to banks, draining
trading liquidity.
Combined with stricter
regulatory requirements in the form of Basel III and proprietary trading
restrictions, market-making has only got costlier in a shrinking
market. Research firm Celent estimates the cost of trading cash credit
under the Basel III reforms for big investment banks has nearly doubled.
In October, UBS said it was axing 10,000 jobs and closing its global fixed income business.
"Electronic trading in Asian fixed income markets is set to grow even
as the broader market becomes more concentrated in the shakeout," said
Abhi Shroff, principal at Greenwich Associates, a financial research and
consulting business.
Coiled spring
One largely untapped sector in Asia is government debt. Electronic
trading in South Korea and Japan has a market share in the early teens,
according to various estimates, with Singapore and Hong Kong among the
markets next in line for growth.
In contrast,
nearly half of the European government debt market and more than 80
percent of US Treasuries are traded electronically.
Greenwich's Shroff says his firm's annual survey of more than 1,000
market participants in Asia-ex Japan also shows great interest in online
trading trends in local currency bonds.
That
potential in Asia has sparked a rush to secure market share through
either single-dealer, where someone wanting to buy a bond deals directly
with a bank, or multi-party platforms, which throw a bid out into a
pool of dealers, banks and brokers.
Most of the
top-tier bond trading houses such as Goldman Sachs, Deutsche Bank and JP
Morgan have their own e-platforms. Blackrock, one of the largest money
managers, offers trading on its new platform.
Thomson Reuters and rival Bloomberg LP, which compete in providing
financial news and information, have platforms, along with other players
such as MarketAxess and Bondvision.
Single-dealer platforms have been less successful in debt than for FX or
equity trading, where products are more homogenous and can be
structured for clients. The sheer number of bonds makes it very
difficult for even a global bank to hold large inventories.
Further aiding multi-party platforms, some regulations require fund
managers in pension funds and insurers to seek a number of quotes before
entering a trade.
"Asia is like a coiled
spring. When bond markets open up completely to foreign investors, there
will be tremendous growth," JP Morgan's Hari said. — Reuters
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