Trading more and disclosing less in Emerging Markets

Background:

At MarketAxess, I wrote an article as part of a comprehensive product marketing campaign for MarketAxess' Block Trading solutions (blocks refer to trades above $5m). This piece follows an email campaign, sales collateral development, and a webinar that I developed to conclude the campaign.

Format: 

Blog article

Trading more while disclosing less in Emerging Markets

2023 was not an easy year for Emerging Markets (EM) fixed income investors. The Federal Reserve’s aggressive rate hikes, widening discount margins, and further uncertainties about China’s economic growth combined to undermine both sentiment and trading activities. This is especially evident in the EM credit markets, with volumes having fallen significantly across Central and Eastern Europe, Latin America and Asia bonds. 

Despite this challenging environment, developments on the MarketAxess platform show that the move towards electronic trading is still gaining momentum within EM. For example, the volume of hard currency bond trading, while having slowed considerably in the wider market, has held up on the platform, meaning a greater percentage of these trades are now being done electronically. At the same time, the growth for local currency bond trading has also been in line with that in the overall market. 


The electronic edge

An encouraging sign is that the move towards electronic platform for block trading, a segment that has traditionally been more resistant to electronification, has also continued to gain traction in the past year. Our data indicates that both trade counts and volume for block trading – defined as deals over $5 million in value – for local markets doubled in 2023 from the levels in 2020.

More remarkably, a significant portion of these transactions are coming from users in more diversified geographical regions, including South America, South Africa, and Asia. At the same time, clients who have been trading blocks electronically, are also pushing the boundaries and increasing their size thresholds . For example in our Local Currency offering, we are seeing transactions between $20 to $25 million becoming increasingly commonplace; compared to the $10 to 15 million range that was more common just a year ago.


Block Trading for Emerging Markets

In the quest for efficiency, visibility, and liquidity in these opaque markets, EM traders are turning to cutting-edge technology. And in the case for block trading, there is the unique challenge of large orders swaying market prices. Financial institutions often need to conceal block trades, such as breaking up the block into smaller trades.  

Preventing information leakage is paramount. And this is why our Request for Market (RFM) solution is so beneficial. It allows investors to request two-way pricing with no direction or trade disclosure other than to the winning dealer. Without revealing the direction of the trade, or if in fact the trade executed, traders can keep information leakage at a minimal and safeguard against undue market impact. This protocol has been instrumental to the growth of local markets volume electronically and has allowed for increased dealer participation on our platform.

Request for Market (RFM) in action

RFM response from dealers

In the past year, we have also introduced RFM Workup. With this new protocol, clients trading EM local currency bonds no longer need to submit a new trading ticket when they want to top up their orders on RFM Local Market trades. Available for all 28 EM local currencies on MarketAxess, this new feature lets clients to enter into workup with dealers upon execution of their orders. 

By removing winner’s curse, clients benefit from competitive initial execution and are able to discreetly trade more risk directly with the winning dealer. This enhanced workflow creates more orderly market conditions and ultimately helps to limit information leakage.

RFM Workup: Criteria set

RFM Workup: Post-trade

For large and sensitive trades, particularly in credit markets, who you choose to trade with matters. But making that decision may not be a straightforward or easy one. Our AI-assistive tool, Smart Dealer Select (SDS), was developed specifically to address this need, by intelligently matching buyers with dealers. 

Based on parameters you can control, SDS algorithmically highlights dealers with actual liquidity, using real-time and unique data-driven indicators to help clients achieve a more targeted, selective liquidity pool on larger, sensitive inquiries. As such, information leakage on sensitive inquiries is limited and the chance for a competitive quote is optimized. In fact, we have seen that trades utilizing SDS have a +70% chance of execution.

Smart Dealer Select: Set up

Smart Dealer Select in action

Go electronic or go home

There is an assumption that going electronic means having to give up discretion, because more market participants might become aware of your information. But in actuality, a wider liquidity pool, along with our tools like RFM and SDS that allows for discrete inquiries and data-driven dealer selection, helps ensure that you are reaching the right counterparties for your larger, sensitive trades. We provide the tools; you choose how to use them to meet your trading needs.

As we look ahead, the shift toward electronic trading for Emerging Markets is not just a trend but a transformation. Solutions, such as our Request-for-Market and Smart Dealer Select, demonstrate how traders can reconcile the need for robust trading volumes with the imperative of discretion – ultimately returning control and confidence to market participants.


Interested in our block trading tools for Emerging Markets? 

REQUEST A DEMO →