Algorithms (algos), execution BOTS and artificial intelligence (AI) are fast becoming the norm in the world of FX and equities. Long gone are the days of trading pits, bulletin boards and traders frantically shouting out buy and sell prices. However, the story is somewhat different for local (emerging) markets trading, where transactions primarily happen over the phone…until recently.
With a growing interest from investors and an increased demand for liquidity, information and price transparency, local markets are being propelled into the digital age, with more and more debt and derivatives markets becoming electronic.
Why has electronic bond trading historically lagged FX and equities markets?
Liquidity is an essential requirement for creating electronic markets. While the global bond market is estimated to be about $128.3tn USD- equivalent1, due to the complexity of bonds, fixed income markets have traditionally lagged behind currency and equities when it comes to electronic trading. The fragmented nature of debt markets, owing to the millions of bonds available each with different maturities and legal frameworks, makes some bonds challenging to trade and limits the potential for electronic trading. In addition, bonds are typically traded less frequently than FX and equities as they are largely bought by professional investors and held for longer periods of time. Taken altogether, this creates a low-liquidity environment in comparison to FX and equities. This is particularly true for local market debt, which sees even lower liquidity and higher trading costs compared to more developed markets.
Digitising bond trading
Electronic trading creates greater liquidity and improves price transparency, which has traditionally been difficult to come by in local markets. The electronification of fixed income markets started following the financial crisis in 2008. With stricter regulations in place, there was greater demand for information, data and increased price transparency, leading banks and trading venues to modernise their trading infrastructure and look for ways to digitise bond trading. As a result, electronic trading is transforming the way investors trade bonds and is spurring greater demand for local market government debt.
At the same time, local market bonds offer opportunities for higher returns, correlating with their riskier nature. Given the low interest rate environment brought about by a weekend global economy, this is an attractive option for investors in search of higher yields. Data from MarketAxess suggests volumes for local market bonds were nearly six times higher at the end of 2020 compared to 20152.
It’s not just bonds that have seen growing interest in local markets. The electronification of FX swaps and interest rate swaps (IRS) has also resulted in increased volumes across local market electronic platforms in recent years.
Tradeweb shows that volumes for local market interest rate swaps (IRS) more than doubled in 2021 compared to the previous year3. While electronic IRS are an even more recent development than electronic bond trading, BNP Paribas already has a strong presence in this market and remains at the forefront of innovation. For example, the bank recently executed the first-ever Brazilian Real interest rate swap on Tradeweb.
BNP Paribas: a leading provider in local markets
“At BNP Paribas, we have embraced electronic developments in the local markets space and are closely engaged with electronic platforms,” commented Stephanie Bonan, Head of local market rates sales New York at BNP Paribas. “As a leading digital bank with a strong local markets presence, we are constantly looking for ways to innovate markets and are the first provider of HKD, SGD, MXN and BRL liquidity on Tradeweb.”
“We are seeing more and more clients turn to digital solutions in local markets and are able to support this growing demand through our local markets expertise,” commented Joe Nash, FXLM.COMM eCOO at BNP Paribas. “We demonstrate this through our rankings on competitive e-platforms. We are currently the number one ranked liquidity provider on MarketAxess for local currency bonds globally.”
BNP Paribas: local experts for global needs
BNP Paribas has a strong presence in local markets and has been active in APAC since 1860, CEEMEA since 1863 and LATAM since 1914. With around 300+ staff based locally across Trading, Sales, Structuring, Solution and Research, BNP Paribas is able to support its global clients in multiple local markets and provide on-the-ground expertise. To find out more about BNP Paribas’ local markets business, contact your BNP Paribas Sales rep.
What’s next for local markets?
The rapid deployment of new technology is also helping to accelerate the growing trend in local markets. Multi-dealer platforms have started offering all-to-all trading for bonds. This allows non-dealers to trade anonymously with other non-dealers, decreasing the reliance on broker-dealers, and has become a major source of liquidity in these markets. Similar to what was seen in FX markets, all-to-all trading gives traders and other market participants better price transparency. This could help prices become tighter and potentially facilitate a shift from request for quotes (RFQs) to streamed prices, which in turn could lead to the evolution of algos in the local market space.
As well as this, request-for-markets (RFM) has allowed traders to do large block orders electronically without exposing their trading side, enabling fairer price information. Traditionally, electronic platforms were used for smaller trades, but RFMs are unlocking the potential for much larger trades, once again improving liquidity in local markets.
The move towards electronic trading and the evolution in technology are causing a significant increase of liquidity in local markets. As with FX and equities markets, banks will now be looking at how they can introduce pre- and post-trade analytics, algos and other digital tools to support clients’ trading needs and further improve price transparency. For example, BNP Paribas is looking to leverage natural language processing (NLP) to automate interest rate and bond trading, similar to its digital assistant, ALiX, created for automated execution in FX markets. So, while local markets trading has until now remained in the dark ages, it appears to be finally catching up with FX and equities globally, unlocking a world of possibilities for banks and market participants.
BNP Paribas’ digital offering in the FX space
BNP Paribas offers a multi-award winning FX algo execution suite, Cortex iX. As part of its offering, the bank also recently introduced a new BRL algo, further demonstrating BNP Paribas leading position in digital solutions and strong local markets presence. Read about the latest innovation here.
- International Capital Markets Association (ICME), 2020, https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/Secondary-Markets/bond-market-size/ [date accessed: September 2021]
- MarketAxess data
- Tradeweb data