An electronic age dawns on Asia's bond markets

Mon Dec 10, 2012 4:00pm EST

* Asian issuance at record levels, but turnover tight

* Growth will be led by e-trading, not trading jobs

* Competition between multi-dealer vs single-party platforms

By Saikat Chatterjee

HONG KONG, Dec 11 (Reuters) - A latecomer to electronic bond trading, Asia is now catching up to the rest of the world as falling trading volumes and increased regulatory requirements put the squeeze on bank trading desks, even as new issues soar to record highs.

Nearly half of Asian dollar-denominated corporate debt is now traded electronically on platforms offered by major banks and other market participants, from nothing four years ago.

While there will always be a need for experienced hands as Asian bond markets deepen, the shift to electronic trading will further rationalise an already concentrated market -- the top 6 firms control more than half of global fixed income turnover -- as second-tier players exit or pare back operations.

JP Morgan, a top-tier bond trading house, is a case in point. Shankar Hari, head of fixed-income structuring & FX products, Asia ex-Japan says while the bank has "incrementally added traders and sales people", the focus is on its electronic trading platform.

"We realise this is the only way forward and with the new regulations coming, we should be in a position to increase market share," Hari said.

The push to e-trading efficiency ahead of hiring more traders is driven by a harsh reality: Deutsche Bank says global investment banking revenue will fall to $240 billion this year, down by a third from 2009.

It's not that the supply of bonds is drying up -- Asian issuers have sold nearly $132 billion in international markets so far this year, a record that dwarfs the $76 billion issued in 2011.

But as big bond investors such as pension funds and insurers have grown increasingly worried about counterparty and market risks, they have hoarded their securities rather than loaning them to banks, draining trading liquidity.

Combined with stricter regulatory requirements in the form of Basel III and proprietary trading restrictions, market-making has only got costlier in a shrinking market. Research firm Celent estimates the cost of trading cash credit under the Basel III reforms for big investment banks has nearly doubled.

In October, UBS said it was axing 10,000 jobs and closing its global fixed income business..

"Electronic trading in Asian fixed income markets is set to grow even as the broader market becomes more concentrated in the shakeout," said Abhi Shroff, principal at Greenwich Associates, a financial research and consulting business.

COILED SPRING

One largely untapped sector in Asia is government debt. Electronic trading in South Korea and Japan has a market share in the early teens, according to various estimates, with Singapore and Hong Kong among the markets next in line for growth.

In contrast, nearly half of the European government debt market and more than 80 percent of U.S. Treasuries are traded electronically.

Greenwich's Shroff says his firm's annual survey of more than 1,000 market participants in Asia-ex Japan also shows great interest in online trading trends in local currency bonds.

That potential in Asia has sparked a rush to secure market share through either single-dealer, where someone wanting to buy a bond deals directly with a bank, or multi-party platforms, which throw a bid out into a pool of dealers, banks and brokers.

Most of the top-tier bond trading houses such as Goldman Sachs, Deutsche Bank and JP Morgan have their own e-platforms. Blackrock, one of the largest money managers, offers trading on its new platform.

Thomson Reuters and rival Bloomberg LP, which compete in providing financial news and information, have platforms, along with other players such as MarketAxess and Bondvision.

Single-dealer platforms have been less successful in debt than for FX or equity trading, where products are more homogenous and can be structured for clients. The sheer number of bonds makes it very difficult for even a global bank to hold large inventories.

Further aiding multi-party platforms, some regulations require fund managers in pension funds and insurers to seek a number of quotes before entering a trade.

"Asia is like a coiled spring. When bond markets open up completely to foreign investors, there will be tremendous growth," JP Morgan's Hari said.