Question: What is API based solution and why it is used?
Answer: As you have seen in previous question GUI based solutions are creating some issues and introducing risk for buyer and seller in fixed income and there was a need to alternative approach where API (Application Programming Interface) gain focus. API uses the FIX protocol as a standard format to transfer the trade information between the system and integration with various system is now quite easy. So now, on odd-lot, retail-focused ECNs, most of the quotes are delivered in real-time via API. With the having API based solution, any price makers can enter prices from one system connected to all the ECNs and price reaches to all the system in milliseconds. Bloomberg has its own Bloomberg-Trade Order Management System, which is a single entry system for fixed income dealers. Because of popularity of APIs from all ECNs reduces or almost eliminate the need which require extra monitoring and manage and helps in integration with post-trade processes. However, it is not easy to make decision for the price and which is still entered by Human. Hence, many of the existing system whether they are for the institutional fixed income for retail investor both support the GUI and API based trading platform for example Tradeweb, BondDesk.
Question: What all are the advantages and benefits you can think of Electronic Trading?
Answer: Electronic trading has become an increasingly important part of the fixed income market landscape in recent years. It has contributed to changes in the market structure, the process of price discovery and the nature of liquidity provision. The rise of electronic trading has enabled a greater use of automated trading (including algorithmic and high-frequency trading) in fixed income futures and parts of cash bond markets. Innovative trading venues and protocols (reinforced by changes in the nature of intermediation) have proliferated, and new market participants have emerged. For some fixed income securities, “electronification� has reached a level similar to that in equity and foreign exchange markets, but for other instruments the take-up is lagging. The rise of electronic trading is - Creating efficiencies for many market participants - Improving market quality - Lowering transaction costs - Reducing market segmentation while at the same time posing challenges to some participants.
Question: What challenges you see in automated and HFS (High-Frequency trading)?
Answer: Electronic trading, like automated and high-frequency trading, bring in a number of challenges for policymakers, for example - Need to monitor its effect on market liquidity - Quality of market Functioning - Ensuring appropriateness. - Governance of automated trading - Is implication for market design.
Question: Why do you see that electronic trading is gaining year over year in fixed income?
Answer: There are various factors few of them are below - Advances in technology - Cheaper and cost effective and efficient technology human resources available from various countries specially India(English speaking, highly efficient technical resources at low cost). - Frequent changes in regulation - Changes in the structure and liquidity characteristics of specific markets. - They improve market quality for assets that were already liquid by increasing competition - Broadening market access - Reducing the dependence on traditional market-makers. - Faster price discovery - Drop in transaction cost. US Treasury markets are a prime example of a highly electronic fixed income market, in which a high proportion of trading in benchmark securities is done using automated trading. However, fixed income markets still lag developments in other asset classes due to their greater heterogeneity and complexity. Innovation in technology and also changes in regulatory requirement had impacted the economics of intermediation in fixed income markets. Technology improvements helped dealers to replace human with automated systems. Because of that they are able to reduce costs by automating quoting and hedging of certain trades. Dealers are also able to better monitor the trading behavior of their customers and how their order flow changes in response to news. Dealers are internalizing flows more efficiently across trading desks, providing greater economies of scale for trading in securities where volumes are particularly high. But the growth in electronic trading is posing a number of challenges for traditional dealers. It has allowed new competitors with lower marginal costs to reduce margins and force efficiency gains, and it has required a large investment in information technology at a time when traditional dealers are cutting costs. However, electronic platforms are not the appropriate solution for all securities, particularly for illiquid securities for which the risks from information leakage are high.