Electronic trading in fixed income markets

Electronic trading has become an increasingly important part of the fixed income market landscape. It has enabled a pickup of automated trading in the most liquid market segments. Innovative trading venues and protocols - reinforced by changes in the nature of intermediation - have proliferated, and new market participants have emerged. These recent changes have resulted in a transformation of the market structure, the process of price discovery and nature of liquidity provision. This report - prepared by a Study Group chaired by Joachim Nagel (Deutsche Bundesbank) - explores how ongoing developments are affecting market structure and functioning. It also discusses challenges for policymakers at the current juncture. Drawing on a survey of trading platforms, the report sheds light on the evolution of trading volumes and usage of trading protocols in various market segments. The report further explores how electronification may be affecting market quality. Electronic and automated trading overall tends to have a positive impact in terms of market quality, but there are exceptions. There is a risk that liquidity may have become less robust and prices more sensitive to order flow imbalances. Electronic trading, in particular automated and high-frequency trading, also poses a number of challenges to policymakers, including the need to monitor its effect on market liquidity and functioning and to ensure appropriate governance of automated trading.