3 Advantages of Automated Bond Trading

Capital Markets CIO Outlook | Monday, April 27, 2020

Automated bond trading has enhanced the liquidity aspect of bonds, along with the possibility of real-time trade execution.

FREMONT, CA: Bond trading is one way for traders to make profits from fluctuations in the value of government or corporate bonds. With automation transforming various aspects of trading, the bond market is not untouched either. Automation of fixed income trading promises numerous advantages and opportunities to various participants. Automated bond trading traverses over a number of areas of activity. While some of the trading activities are more relevant to the buying side, others are more relevant to the selling side. Here are some of the major advantages of automated bond trading.

Improved Liquidity

Conventionally, bonds were debt securities with relatively low trading volumes. Such securities would not sell for days, or even weeks, sometimes. Since their trading volume was low, they were often illiquid and had volatile prices. However, automated bond trading is all set to change this past. Automation of bonds has significantly improved their liquidity, thereby attracting more number of investors.     

Easier Trade Execution

The utilization of order execution algorithms that divides trades into smaller orders has become a common activity among the buy-side in equity and FX markets. This trend is also now being used in fixed income, especially in the context of multi-asset trading. By offsetting market impact and also being able to leverage price improvement opportunities on each order slice, massive cost saving and additional alpha capture become feasible through automated bond trading.

Market Making

Regulation and compliance have also impacted fixed-income market-making. On top of this, the capital cost of maintaining inventory has already caused various firms to an agency only business model. Automated trading can reverse this situation. Automation has reduced the cost of the technology needed to access suitable electronic bonds, thereby offering an opportunity for the firms to participate and service their buy-side clients.

Due to the above advantages, automated bond trading has resulted in a monumental shift in investor’s attitudes towards bond markets.

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