The rise of electronic trading in fixed income markets could lead to liquidity issues in times of stress, according to new research from the Bank for International Settlements (BIS).
Although not at the levels seen in other asset classes, electronic trading has become an important part of the fixed income market landscape in recent years. According to a BIS survey of 30 electronic trading platform providers across the world, there was a 40% increase in average daily trading volume between 2010 and 2014.
The rise of electronic trading in fixed income markets tends to facilitate the matching of buyers and sellers, which improves market quality in normal times. However, it "may also mean less robust liquidity conditions in times of stress," says BIS.
More electronic trading means more algorithmic trading, "which may accelerate the rate at which seemingly ample liquidity can evaporate after the first signs of stress," warns the report
Guy Debelle, assistant governor, Reserve Bank of Australia, says that electronic trading is transforming market structure and the nature of liquidity provision, adding: "It also poses challenges to policymakers, including the need to monitor its effects on market quality and to ensure appropriate governance of algorithmic trading."