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Now in its sixth year, the annual J.P. Morgan FICC e-Trading Survey collated the views of Professional and Institutional traders for 2022. Our Survey offers valuable trading insights and dives into current market trends and examines traders’ perspectives on the road ahead.
Hello everyone, I'm Kate Finlayson, Head of FICC Market Structure at J.P. Morgan. We're here to discuss the results of our recent fixed income currency and commodity e -Trading survey, where we had around 700 respondents, not only from our clients, but from traders in the broader industry. And it covered in addition to FX, credit, rates, futures, and options more extensively. I'm joined by Scott and Andreas. And certainly for us it's interesting to reflect back on some of the predictions that are made, in terms of where things are headed in the year ahead. So feedback from the survey indicated that traders predict inflation to have the greatest market impact in 2022. Andreas, against this macro backdrop of inflation and greater market volatility, how do you look at it through the lens of electronic trading?
In my mind, it's a question of whether inflation expectations have already priced in any uncertainty, and to the extent that central banks will taper the balance sheet, and the pace at which they do that. Any deviations from what the market is expecting will ultimately lead to higher bond volatility. And in a year where we had already a record issuance in January and expected All -In Yields are to be higher. I think it may have an impact on the market. However, that's not our base case, our base cases it's gonna have, you know, a relatively range-based trading market, and that's going to be the main consideration. The main consideration for me is the extent to which market participants will remain consistent in terms of returning prices to clients in an expedient manner, and continue to be as active as they are in normal times. What we have seen during period of COVID at the height of the crisis is a lot of market participants ended up stepping back and removing liquidity from the market, with only few of us actually stepping in to cover those gaps. I expect that to also be the case if we see any increased bond volatility.
So it's interesting. And I think where we are right now going into 2022, looking back on the last couple years, and looking at the survey results, both access to liquidity and price consistency, again, very, very important, and it's not surprising. I think we learned a lot through the pandemic to be honest with you. In a time when a lot of our clients and ourselves were all stepping back to a more remote working environment. We had to harness technology in a much more rapid and thorough way than we ever had before. And as a result, some could do it, some could not. And we saw quite a bit of volatility in terms of who was there for the clients and who wasn't. And one of the things that J.P. Morgan that we pride ourself on is to try and be there for our clients through good times and bad, volatile and non-volatile periods. And, obviously, I think our competitors tried to do the same thing, but that is important for customers. And it's not just on a given asset class. I think it's also cross asset. And that's another thing where I think the expansion of electronic trading is super important and the consistency in pricing. So, if you're trading remotely, you're accessing markets electronically, you need to be able to access liquidity. You need to know that your liquidity providers are there for you, and consistency of pricing is super important. Again, reflecting on the volatility of the time that we've just been through; pandemic, harnessing of technology, and accessing liquidity, one of the other big themes was really the rise of financial technology companies, the products and capabilities that we're developing and offering to customers, and also the use of data, access and use of data and cost of data. And I think these are really big market structure themes. I know it's something we've discussed with our clients a lot. Kate, I know you follow this. I wonder if you can comment on that.
Yeah, quite right. Access to liquidity, top market structure concern, followed closely by developments in financial market technology, market data access, and costs. From our seats, as we see market participants look to connect to liquidity sources, try to capture data in the most efficient way, we can certainly understand those concerns. Technology providers in FX, and increasingly in fixed income, started to make some headway in terms of delivering execution efficiencies, but these are not without costs. So you couple that with market data costs, and transaction costs, and it all starts to add up. So that's why it's really important for our clients to understand the various costs associated with different execution channels, and look at what the most accessible, and what the most efficient access to liquidity would be. As we see one of those solutions development and start to gain traction in the market, and that is around direct connectivity to liquidity providers. Andreas, how are you seeing this develop, and what are some of the challenges there?
Very important topic, Kate. As clients are becoming a lot more mindful about the value of their own data, the impact of their own execution behavior into the market, as the proliferation of EMS's and the various venues. I think we're starting to see the protocol direct connectivity trade get a lot of traction. The reasons are, you know, obvious in my mind, because really people want to understand and control the information leakage of their activity into the market, and ultimately have the best execution protocols that are available to them for the type of liquidity they're looking for. And I think that direct connectivity gives you that. And something we at J.P. Morgan are quite focused on. One of the topics that comes to mind, as this is evolving is really the question around the perimeter of what is a trading venue and what is not. And I know you guys have been thinking about this a lot, given the recent regulatory actions that we've seen over the last few months. Any interesting observations?
Yes, absolutely. This is a topic that we're following quite closely. As we see regulators, policy makers in the EU, the UK, and the US take a look at multilateral activity, what constitutes multilateral activity, and should therefore take place on a regulated trading venue. As part of the ongoing MiFid II review, in ESMA's final report on the organized trading facilities published in April last year, in essence, that broad definition of what constitutes multilateral could encapsulate range of communication functionality, extending to execution management, auto management systems. And so, as we look at that, and how it starts to move from the EU to the UK, as part of the financial conduct authorities wholesale market review. And then onto the US, in September of last year, CFTC's Division of Market Oversight issued an advisory letter, in essence reminding and clarifying to market participants the activities that could trigger the requirement to register as a SEF. And included in that letter is in essence, the view that any trading technology that allows the ability to communicate from either one-to-many or bilateral to bilateral could still constitute multilateral activity. And so, as we see market participants, look to engage with the market, look to interact with each other, look to be able to access liquidity sources and aggregate price streams, then should some of these technology providers need to register as a regulated trading venue that comes with costs as well. So, capital requirements, staffing requirements, reporting requirements, and those costs associated with that, one would argue could potentially change the business model of those particular service providers, and potentially create hurdle rates for startups, hindering potentially innovation in this space, but ultimately end of the day also impact investors and our clients who are looking to use some of this functionality and the cost associated with that as well. So that's something that we can keenly follow.
It's interesting looking at sort of how the regulators are opining on the evolution in the market, the rise of fintechs, the requirement to access liquidity, both in office and remotely, and to leverage various technologies. It is clear that the use of platform, electronic platforms is growing, and I think obviously, staying on top of regulatory concerns and also tracking new entrants into the markets, and what they're bringing, and how they're bringing, and the cost of that is very important. But I think it's very clear when 78% of our participants say that they intend to increase electronic trading that we keep in mind the benefits, right? So when you trade electronically it's quicker, in many cases, the trades are auditable. It gives you data to do pre and post trade analytics. It unlocks opportunities both on the algorithm-trading side, but also on the algorithm order-execution side which then gives benefits on best execution and transparency. So I think these two aspects are gonna dovetail quite nicely going forward, but something to stay on top of. We also ask clients about the most important technology they see going forward. In the next 12 months, they said mobile technology. So again, still a big focus on trading electronically through mobile platforms. So possibly moving away from desktop, et cetera, which I think is very much in-line with some of the workplace environment changes we've seen. And then longer term machine learning. Now we already enhance our offering through machine learning, but I think this particularly is going to be a big theme going forward, and our clients have certainly highlighted that. Where we're seeing a lot of some of the most exciting developments is really on the credit side. Andreas, maybe you can give us an idea of what's going on at the credit side and particularly why it's so interesting.
Credit is definitely the last frontier of algorithmic trading. Not only you have increasing the amount of data, it's a complex asset class, as liquidity comes through all sorts of instruments. You have ETFs from the equity side. You have index derivatives or CDS indices. You have single bonds, you have portfolio trades you have all sorts of venues. So it's not only a complex, in terms of market structure, environment to navigate but it's exciting because you're getting new capabilities both through the new technologies, also the availability of the data. We at J.P. Morgan are spending a lot of time thinking through ways to enhance the client experience, how to better service the franchise, how to consume all that data, internalize the risks and communicate better actionable prices to our clients in an expedient manner, whether it's portfolio trades, and reducing the times it takes us to respond, whether providing more liquidity through actionable streams, and so on and so forth. It's an area that I feel very close to my heart. And I'm very excited about the opportunity set, and what's coming up in the ways we can service our clients in the next few years.
So we seem to have covered quite a bit of ground today, looking at how market participants interact in the market, the mechanisms, the different execution channels, cost associated, innovation, just the tip of the iceberg. We always find it fascinating to see how market is moving forward. We really, really do love to speak to our clients on these topics and themes. So if you'd like to hear more from us, please do get in touch. Thank you. (upbeat music) END
Traders predict that inflation will have the biggest impact on the markets in 2022.
Question asked: Which one of the following potential developments do you think will have the greatest impact on the markets in 2022?
This chart reflects that traders predict inflation (43%) will have the biggest impact on markets. Followed by market and economy distribution (13%), Global pandemic (13%), Equity volatility (8%), International trade tensions (8%), Recession risk (5%), ESG/Climate risk factors (3%), Other (1%) and Brexit (1%).
‘Liquidity availability’ remains the top daily trading challenge for traders for the sixth year in a row.
Question asked: Which of the following will be your single greatest daily trading challenge in 2022?
This chart reflects that Liquidity Availability remains the top daily trading challenge for traders. Followed by workflow efficiency (21%), best execution requirements (12%), regulatory changes (11%), availability and cost of data (9%), remote working (6%), information leakage (4%) and other (2%).