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Market Matters | FICC Market Structure: The future of electronic trading

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Kate Finlayson: Hi, you’re listening to Market Matters, our market series here on J.P. Morgan’s Making Sense podcast channel. I’m Kate Finlayson from the FICC Market Structure and Liquidity Strategy team.

In today’s episode, we’re going to be talking about factors shaping access to liquidity and the trading techniques and tools used by market participants. Of course, I’m delighted to have Chi Nzelu with me, who’s Global Head of Electronic Trading for fixed income currencies and commodities. Chi, thanks for joining today.


Chi: Thanks, Kate, it’s great to be here.


Kate: Chi, we’ve done a couple of podcasts together where we’ve looked at how we define electronic trading, the advances made, what’s driving these advancements auto-quoting, auto-pricing in certain asset classes, the growth of algorithmic execution and other trading techniques, we’ve covered quite a bit. In today’s discussion, I’d like to perhaps take a look at what factors influencing the choice of trading technique and the performance of certain forms of electronic trading. If we start at the macro level perhaps, set against this backdrop of inflation, the current rate environment and any anticipated move by central banks, there is a lot to consider. What are traders looking for as they navigate factors impacting markets today?


Chi: Sure, so I think in 2024 we have two streams of challenges. Anticipated volatility. In terms of inflation, CPI dates, Fed dates, election, for example, could be one of them. And we have unanticipated volatility, like geopolitical issues and tensions that may arise. In all cases, I think availability of liquidity will be key to traders, which should be established before the fact. So for products in the market space, trading on single-deal platforms, traders will likely need to know which of their providers are reliable. Of a depth of liquidity because moving size will be important when things change, as they will through the year. In addition, where they can see an aggregation of high touch and low touch liquidity on a single entry point. So sell side gets stressed when times are volatile and the buy side obviously needs to know where they can rely on execution.


Kate: Okay, you mentioned elections. 2024 is a big election year, and not only in the U.S., in Europe as well, and with the U.K. potential announcement of a general election later this year, and elections across a number of other jurisdictions, looking at Mexico, India, Indonesia, potentially Venezuela, we’ve just seen elections in Taiwan. Clearly, shifts in power and uncertain outcomes often brings more volatility and for certain asset classes, spikes in trading volumes. If we could delve into that a little bit more in terms of how does volatility correspond with choices made about what trading technique to deploy.


Chi: Sure, so on elections, I think if we look back at very recent history, the real risk is shock outcomes, like Brexit, for example, where you see a significant sterling move, or the U.S. election previously where you saw a significant move [inaudible]. And really what we need are what clients expect from electronic trading is availability. The consistency of pricing and risk services even in markets when they move five or ten percent. I think the key thing is how many providers out there can offer such a service and where can you go to get such a service.


Kate: Right, let’s take a look at emerging markets now. With emerging market growth expected to outpace developed markets, we’ve observed various trends in electronic trading. In EM interest rate swap markets, for example, we’ve seen shifts in the protocols used. More requests for market, we’ve seen larger sizes being traded electronically and so on. What are your thoughts on how electronic trading in these EM rates markets could develop further?


Chi: Sure so combining this with the previous point on volatility, typically we see an evolution from voice trading to request for price to streamed two-way prices and algo execution. And then in particularly volatile markets, clients may opt to use algos to avoid significant transaction costs. They may go for risk transfer to get some certainty. I think in the emerging market space, we are probably at the RFQ, RFM stream price level. You don’t have algos in every market, but the availability of pricing will be key. So clients would want to know, get some visibility or insight into transaction costs by way of the bid offer before they execute.


Kate: Something we’ve monitored is of course the electronification of credit trading. So the increased deployment of systematic strategies in the space, the connectivity between algo trading with portfolio trading and the ETF create redeem process. Arguably corporate credit is one of the most interesting and fast developing asset classes for e-trading. What needs to be in place for this to go from strength to strength?


Chi: So the evolution of electronic trading is typically driven by client demand. So clients execute one asset class on platform, and then they expect another asset class to be similar. So clients executing equities in the past expected foreign exchanges of flow product to be available on platform. And they’ve gone from executing securities to expecting treasuries.  So there’s a huge demand for electronic trading on credit products and as a result innovation is driving competition. So we see a large increase in the provision of electronic liquidity and to do that effectively, market data has to be reliable, effective integration of existing high-touch inventory, low-touch inventory to deliver inventory-based pricing as well as a very clean integration from bonds pricing, portfolio trading, and ETF. So I think all these things we see coming together over the next 12 to 24 months.


Kate: Okay, you talk about 12 to 24 months. Could I stretch you a little and say, what about a three-year plan, right? How can we electronic buy markets even further beyond that 24-month period?


Chi: The plan would look something like breadth of products. From a client perspective, the more products you can offer, at least in some size, the more effective it is. They can make independent decisions without the process of price discovery. So I think over the next 24 or 36 or 60 months, you would say, if the multi-dealer platforms expand their product sets and the sales side continue to innovate in electronic distribution, we shall see a rapid pickup towards the end of the cycle.


Kate: How do we do that? How do we scale from there? What are the synergies between technology used across the different asset classes and even with the subproduct level?


Chi: I think the answer is in the question, we have to build for scale. It requires technology investment, and it requires an understanding that the ROI is not year on year, but probably two, three, four years in advance. So if you develop product to price securities, hopefully you could price developed markets, emerging market securities. If you develop product to price investment in great bonds, then you can expand to higher yield and you can consider your credits ETC. So the technology investment is required. I think that stands for everyone, sell side and buy side. But building with scale in mind is really a function. I’m trying to connect the dots across the different asset classes and probably save cost.


Kate: Okay. I mean, I was going to ask you next what the challenges or hurdles will be and clearly take investment spend and how one prioritize that could be one. But what are some of the other hurdles you think you might counter?


Chi: I think just the cultural change habits, you know, moving systems is always difficult. We get used to executing in a particular way. Any change in how we do things incurs risk, market risk, operational risk. So new and evolving methods of execution really have to offer something unique in the way of pre-trade TCA, post-trade TCA transaction costs saved on execution. It also becomes very difficult. On the flip side, that’s a really good thing because sales side, providers have to be really innovative in the services they want to introduce.


Kate: Thanks Chi, we’ve spoken about advances in electronic trading, what could shape the performance and different tools, but I suppose one factor we haven’t touched on is artificial intelligence and its use in electronic trading. How do you think market participants may look at deploying AI in their trading models?


Chi: So, going back on the previous question, technology is aligned with data capture. Data capture electronification feeds very well into more advanced techniques, machine learning AI. So where we have clients or sales side providers that have invested in data capture electronification, we think that will provide a very, very strong start point for most sophisticated technologies. Unfortunately, there’s an asymmetry in innovation. So where people find something really interesting on AML, that doesn’t really make it to the public domain. So we see clients, sell side people chasing similar things individually, but hopefully it should all result in more effective price provision, more interesting products to manage risk and more intelligence around how we understand markets. So we see a lot of things coming out in price provision, sentiment analysis, productivity tools from code generation to chatbots in our space, which are not really there in the financial sense now.


Kate: Chi, an opportune time to be talking to you, actually, given we’ve just received the results of the E-Trading Edit – the survey in its 8th year. This online survey was answered by over 4,000 institutional and professional traders over 65 locations, that’s where we’ve received that from. And I think what’s really interesting is that it’s changed over the years to be multi-asset focused, which I think is particularly insightful. How do you think this speaks to platform usage and engagement?


Chi: So electronic trading by nature has to be driven by platform. Clients will have to elect what platform they want to use to transact across the different products. Typically clients look for platforms that offer everything. It takes a lot of desktop real estate to have multiple platforms to deal in. So we are particularly attentive to the innovative platforms that are driving that customer experience. And we try to focus on the breadth of services that we can provide. We also think the participation rate in the survey is a convergence of factors. Electronic trading is picking up across other asset classes. We saw recent breakthrough technology in the AI space from transformers. So all these things combined together to deliver what we think could be a hypercurve on the growth of electronic trading.


Kate: Thanks, Chi. It’s always a pleasure speaking with you. We’ve covered a great deal today, and from the sounds of it, some really interesting times ahead in the development of electronic trading.


Chi: Thanks, Kate. It was great to be here with you. Super excited about the innovations coming 2024 and the results of the e-trading survey.


Kate: Right, and to our listeners, stay tuned for more FICC market structure and liquidity strategy content on this channel. Have a great day.



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Transition in motion

Discover how J.P. Morgan supports clients along the journey toward a low-carbon economy — every step of the way.

| 1:30

Transition in motion

Discover how J.P. Morgan supports clients along the journey toward a low-carbon economy — every step of the way.

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