What were the main dynamics in the secondary EM bond market last year, and how were they reflected in the firm’s trading volumes?
The last two years have been challenging for emerging markets. As central banks across the globe started raising interest rates and inflation levels spiked, investors flocked to developed markets such as US investment-grade and high-yield credit. Now that the macro back-drop has improved, and central banks are slowly moving into a position to begin delivering rate cuts, we have already seen inflows across our platform start to improve across EM.
The main change is the overall growth of electronic trading. In terms of scope, speed and size, e-trading has really flourished. Another trend worthy of note was the growth of local markets and the larger trade sizes we’ve seen there. Local markets are predominantly local currency government bonds, which are rates products. As a result, clients and dealers have been much more comfortable trading larger trade sizes.
Our total local market volumes grew 18% year-on-year in 2023, with a dramatic 40% rise in Asian markets and a record year for LATAM. This has continued into 2024, with our local market volumes for Q1 up 23% year-on-year. We’re firing in all segments across the globe, but local emerging markets as a whole continue to show record trading volumes each year. When we look at trades larger than $25 million, the number of these trades was up 23% in 2023 and we’ve seen a 28% increase in Q1 this year.
What’s really striking is that last year, primary issuance in hard currency emerging market bonds was down with issuance and secondary trading lower across the board. But secondary trading volume of EM hard currency bonds on our platform was up 3.3% in 2023, and that's continued into this year. Emerging markets are continuing to experience mixed fortunes, but what is consistent is that MarketAxess’ clients are continuing to execute larger trades via e-trading protocols.
How have both the firm's platform and the wider market for EM bond trading evolved in recent years?
One product that has seen exceptional adoption in local emerging markets is MarketAxess’ Request-for-Market (RFM). This protocol allows clients to ask a two-way price that provides excellent execution by giving access to both local and international liquidity pools, while protecting the information for both the client and for the winning dealer.
In addition, MarketAxess has an algorithmic pricing engine CP+™, which has become one of the leading tools underpinning pricing algos across the sell side. Unlike other pre-trade data offerings, this isn’t a composite — this is an algorithmic prediction of where the next trade will take place. Depending on the region there are between four and eight algorithmic market players pricing emerging markets credit at the moment, and that number will only grow. Having CP+ as the underlying benchmark upon which all other algorithmic tools are built will ultimately result in quicker, more efficient pricing and better outcomes overall for clients.
In the broader market, we’ve noticed an increased prevalence of alternative liquidity providers in emerging markets, such as systematic desks and ETF providers. They have not only broadened the kind of liquidity available but have also responded to growing demands from the buy-side for quick, accurate and reliable pricing. For these kinds of investors, being able to plug into the MarketAxess platform really gives them a distribution that can’t be found anywhere else.
Along with the growth of ETFs, the market has also seen an increase in Portfolio Trading activity in the market.
What factors have been key to the firm’s success?
I was a MarketAxess client for 21 years before joining the firm, and the company truly has a high quality, end-to-end platform that makes it a unique venue for the fixed income market. Equally important, the system is user-friendly. We're in a complex industry and it’s important to design systems and protocols that are intuitive. I don’t think I appreciated how much time and effort goes into delivering the final product by the time it shows up on dealing floors.
Several things have stood out to me since I joined. First, the firm’s constant desire to improve and innovate in terms of products and functionality. Second, the quality of the team. There is a genuine culture of collaboration across teams and geographies. Finally, the breadth and depth of our EM client and dealer network which spans across 120+ countries and over 1,600 market participants. We speak to clients trading emerging markets in every conceivable geography. Not only does this provide unrivalled liquidity, but when combined with cutting-edge data, it creates an emerging market offering that’s able to drive the market forward and help define the protocols of tomorrow.
What does the future hold for the firm in EM bond trading?
Client feedback indicates a strong desire for executing larger trades, and in the second half of the year we’ll be focused on developing solutions to meet this specific requirement. Our goal is to ensure both dealers and clients have an optimal trading and execution experience when trading bigger trades on MarketAxess.
As part of our local markets franchise globally, we are excited about adding India government bonds to our portfolio of products, which were just included in the JP Morgan GBI-EM index – the most widely followed local currency bonds index by global investors.
Finally, we’re really enthusiastic about the prospects in Latin America. We have an excellent portfolio of protocols in key markets like Brazil, where we recently added Casada, to support greater liquidity discovery for local and international investors trading Brazilian debt strategies.
The backdrop for emerging markets is positive for the remainder of 2024 and into next year. With e-trading permeating deeper and deeper into these markets, the opportunities and tools are there for global investors to capitalise on new markets.