The fixed income market has undergone dramatic changes over the past several years and become increasingly electronic.
Currently, electronic trading represents 57% of the US fixed income market's average daily volume (ADV) and is projected to reach 62% of ADV by 2010, according to a new report, Electronic Bond Trading: Reaching the Tipping Point from Celent, a Boston-based financial research and consulting firm.
Key findings of the report include:
- The US fixed income market has experienced strong growth and is the largest marketplace in the world (representing 40% of the global bond market), with outstanding amounts rising from US$12 trillion in 1996 to US$29.2 trillion in 2007 and a CAGR of 7.7%.
- The largest fixed income product segment is the mortgage-related securities segment, which represents nearly one-fourth of the US market, with approximately US$7.1 trillion in outstanding debt in 2007. This market has been particularly affected by the recent subprime crisis, which has forced market players to re-evaluate risks and pricing.
- The European fixed income market is the second largest market, representing approximately US$22.3 trillion, with Germany accounting for US$5 trillion and Italy representing US$3.6 trillion. In Asia, Japan comprises 12% of the worldwide outstanding debt at US$8.7 trillion and dwarfs any other Asian country, including China (US$1.4 trillion).
- Currently, electronic trading represents 57% of the US fixed income market, with a CAGR of 17% since 2003, when electronic trading accounted for 30% of the US fixed income market.
- The development of electronic trading occurred particularly in the most liquid fixed income segments, which are the US treasury and mortgage-based securities (MBS). Treasury instruments represented an average daily trading volume of US$539.5 billion for the first half of 2007, and MBS reached an average daily trading volume of US$319.3 during the same period. Currently, electronic trading represents nearly 80% of the treasury segment. Thus, the growth potential is in the mortgage-based securities segment, where only 32% of trades are currently executed electronically. Celent expects that this will reach nearly 35% in 2010.