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  5. The Future of Electronic Fixed Income Trading-- Cash and Derivatives: Regulation and Dealer Economics Spur Innovation in Dealer-to-Client Markets

The Future of Electronic Fixed Income Trading-- Cash and Derivatives: Regulation and Dealer Economics Spur Innovation in Dealer-to-Client Markets

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26 August 2012
Joséphine de Chazournes David Easthope

Abstract

The economics of fixed income dealing operations is evolving due to market structure changes, emerging regulations, and disruptive technologies already in the market and on the horizon. As new regulations continue to put pressure on revenue models, firms are investing in innovation in areas such as trading models, price discovery, and trading technology.

In the report, The Future of Electronic Fixed Income Trading--Cash and Derivatives: Regulation and Dealer Economics Spur Innovation in Dealer-to-Client Markets, Celent dissects trends and developments in the fixed income trading value chain and explores how regulation and revenue pressures are fostering innovative designs in the marketplace.

The fixed income trading value chain is evolving more significantly than any other across the range of asset classes. Whereas FX and equities underwent significant transformations toward electronic platforms and technology supporting trading workflow years or even decades ago, fixed income is only just catching up.

Some of this evolution is industry-led due to declining profits and a desire to improve efficiency by leveraging technology, but most of it is due to factors outside the industry’s control, as a myriad of national and multinational regulatory efforts strain business models, force capital optimization, and mandate certain clearing models. Major initiatives include Basel III, the Volcker rule, EMIR, Dodd-Frank and MiFID2 in Europe.

“The net result of these regulatory initiatives will severely impact dealer models, putting pressure on revenues, and thus liquidity in secondary markets,” says Josephine De Chazournes, Senior Analyst with Celent’s Securities & Investments Group and coauthor of the report.

“Due to the impact on liquidity and dealer models, a number of firms are investing in innovative business designs,” adds David Easthope, Senior Analyst with Celent’s Securities & Investments Group and coauthor of the report. “Innovation in cash markets is occurring in areas such as trading models, price discovery, and trading technology.”

This report examines the evolution of fixed income, developments in the value chain, and the evolution of liquidity and trading. Celent identifies innovative new business designs in fixed income trading models, price discovery and trading technology. The report also provides market scenarios for different instrument classes in the US and Europe.

This 36-page report contains 5 figures.

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