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Why digital bond trading is the future
Simon Fasdal
The bond market is one of the oldest and most relied-upon investment classes, providing key financing for governments, corporations, mortgages, and larger infrastructure projects, for example.But despite the $50 trillion market’s longstanding popularity with both institutional and retail investors, digitisation has been incredibly slow. For too long, fixed income trading has been hamstrung by its old-fashioned operations, and in this age of artificial intelligence and automation it is a surprise to most that bond trading is still generally executed manually, usually via a phone call.
The launch of Saxo Bank’s digital bond trading solution in late 2016 set out to change this and was motivated by our recognition that the bond market was ripe for digital innovation and democratisation. How can it be that one of the most established forms of financial investments is still stuck in the dark ages of manual processing when there is technology which can be applied in different ways to make fixed income trading more accessible for all investors (and not just professional traders), but also cheaper?
By combining technological capabilities in the form of robotics and relationships with the largest liquidity providers in the bond markets, we are now able to offer both retail and institutional clients the world’s first fully digital fixed income solution providing more transparency, sharper prices, and more efficient access to fixed income trading opportunities.
Why has it taken so long to digitise bond trading? One of the main factors is that the bond market is far more fragmented than, say, the equity market. There is no single execution venue for bond trading, and price formation is over-the-counter with an opaque cocktail of indication pricing and very different liquidity profiles and trading behaviors across different bonds and markets.
Likewise, the scale of the bond market is vast compared to the equity market. There are approximately 43,000 stocks in the world and millions of bonds. A company may have one stock, but they issue dozens of bonds, with different maturities and unique legal frameworks. Each of these bonds will have varying liquidity and some are more challenging to trade.
Despite the complexities of trading bonds, the days of fixed income trading being solely the preserve of a select few large funds, banks, and investors are now over. By combining robotic technology and connectivity we are democratising the bond trading offering and levelling the playing field between institutions and retail investors wanting to access this market.
The launch of Saxo Bank’s digital bond trading solution in late 2016 set out to change this and was motivated by our recognition that the bond market was ripe for digital innovation and democratisation. How can it be that one of the most established forms of financial investments is still stuck in the dark ages of manual processing when there is technology which can be applied in different ways to make fixed income trading more accessible for all investors (and not just professional traders), but also cheaper?
By combining technological capabilities in the form of robotics and relationships with the largest liquidity providers in the bond markets, we are now able to offer both retail and institutional clients the world’s first fully digital fixed income solution providing more transparency, sharper prices, and more efficient access to fixed income trading opportunities.
Why has it taken so long to digitise bond trading? One of the main factors is that the bond market is far more fragmented than, say, the equity market. There is no single execution venue for bond trading, and price formation is over-the-counter with an opaque cocktail of indication pricing and very different liquidity profiles and trading behaviors across different bonds and markets.
Likewise, the scale of the bond market is vast compared to the equity market. There are approximately 43,000 stocks in the world and millions of bonds. A company may have one stock, but they issue dozens of bonds, with different maturities and unique legal frameworks. Each of these bonds will have varying liquidity and some are more challenging to trade.
Despite the complexities of trading bonds, the days of fixed income trading being solely the preserve of a select few large funds, banks, and investors are now over. By combining robotic technology and connectivity we are democratising the bond trading offering and levelling the playing field between institutions and retail investors wanting to access this market.
Our fully digital solution has no human involvement. It connects each client with the entire global bond market in a direct, competitive and efficient manner. Each bond order is directed to an optimised dealer auction which is selected via robotics from up to 40 of the largest bond liquidity providers. Not only does this have a huge impact on speed of transaction, but most importantly clients are seeing huge cost savings due to the direct value chain and competitive nature of the multi-dealer environment.
It was an ambitious project for us but the results speak for themselves. We now see more than 50% of all bond trades executed via our digital platform, with that figure growing every single month since the launch. This change is happening progressively as clients are also changing their habits and feeling the power of the democratisation, but the change is happening.
I think investors recognize that our digital platform offers huge advantages for them both in price improvement and speed of execution, which has been reflected in the fast adoption of the technology. Our data shows that almost half of the trades made by our clients to date see a 0.10% price improvement in comparison to the average price in the market, with others seeing even more significant price advantages. Coupled with our competitive pricing on commission and currency conversions, this is undoubtedly an enormous advantage for our investors.
It was an ambitious project for us but the results speak for themselves. We now see more than 50% of all bond trades executed via our digital platform, with that figure growing every single month since the launch. This change is happening progressively as clients are also changing their habits and feeling the power of the democratisation, but the change is happening.
I think investors recognize that our digital platform offers huge advantages for them both in price improvement and speed of execution, which has been reflected in the fast adoption of the technology. Our data shows that almost half of the trades made by our clients to date see a 0.10% price improvement in comparison to the average price in the market, with others seeing even more significant price advantages. Coupled with our competitive pricing on commission and currency conversions, this is undoubtedly an enormous advantage for our investors.
In parallel with the price advantages, we’ve proven that digital bond trading is faster than the traditional manual trading method. Of all trades from our clients since launch our records show that it takes no more than 41 seconds for a trade to be executed and booked to the client’s account via our digital bonds trading platform. This is a dramatic improvement on the manual method of bonds trading that can potentially take minutes, hours or even days to be executed.
In addition to our own clients, where we see some of our biggest success as measured by actions is from many of our partner banks who are very excited about the digital bond technology, as they see a great opportunity to reduce cost and complexity and add very concrete value to their end clients.
As Saxo we are strategically focused on becoming the preferred provider of trading and investing infrastructure to big banks and financial institutions. This is a journey which we started back in 2001 when we made our first white label deal and it is a vision we are constantly expanding, most recently with the release of our “banking as a service” product.
Our partner companies can see that it will take a lot of time and investment to create a trading platform with the advanced functionality that we offer. Rather than starting from scratch themselves, they can see the value in partnering with us instead to stay ahead of the competition.
These innovations are all possible through the use and clever application of technology and robotics. Where once trading and investments was for only elite investors, we have now been able to democratise bond trading so there is no longer any barrier to entry. Now is the time to let technology do its job.
For a brief tutorial on how to trade bonds in SaxoTraderGO, click here.
In addition to our own clients, where we see some of our biggest success as measured by actions is from many of our partner banks who are very excited about the digital bond technology, as they see a great opportunity to reduce cost and complexity and add very concrete value to their end clients.
As Saxo we are strategically focused on becoming the preferred provider of trading and investing infrastructure to big banks and financial institutions. This is a journey which we started back in 2001 when we made our first white label deal and it is a vision we are constantly expanding, most recently with the release of our “banking as a service” product.
Our partner companies can see that it will take a lot of time and investment to create a trading platform with the advanced functionality that we offer. Rather than starting from scratch themselves, they can see the value in partnering with us instead to stay ahead of the competition.
These innovations are all possible through the use and clever application of technology and robotics. Where once trading and investments was for only elite investors, we have now been able to democratise bond trading so there is no longer any barrier to entry. Now is the time to let technology do its job.
For a brief tutorial on how to trade bonds in SaxoTraderGO, click here.
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