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Asset Management / Wealth Management
Private banks tap AI for fixed income trading
Use of big data and other technology tools cited for 120% increase in trading volume in Asia last year
Bayani S Cruz 7 Jun 2024

The urgent demand for data and automation is pushing private banks in the Asia-Pacific region to tap solutions utilizing artificial intelligence (AI) and other sophisticated technology tools for fixed income trading, which has been traditionally a manual, phone-based business.

“Unlike equities trading, which had embraced technology earlier, fixed income trading has always been a rather manual OTC (over-the-counter) business. But with the help of technology, big data, and AI, we can now get very high-quality reference prices,” says Erik Tham, head of product management, global private banking, at MarketAxess, in an interview with The Asset.

The use of technology has contributed to a 120% increase in the volume of fixed income trading by private banks in Asia in 2023 alone. “This growth has been driven by different factors, one is obviously that 2023 was the year of US high-grade bonds with attractive yields and we’ve seen among our private banking clients on our platform in 2023 a global growth of 30% of the high-grade products. That’s a big driver. If I drill down to the private banks in Asia, the growth was more than 200%,” Tham says.

The huge trading volumes are pushing many fixed income traders to resort to automation to cope with the rapid growth in the business.

“For some of them, it’s really an absolute necessity to survive in these markets. Yet on days where you have lots of volatility or days where you have maybe a discretionary mandate flow coming in on a private bank execution desk, you easily have a long, long list of orders, typically also smaller sizes compared to the big institutional guys. And that's perfect order flow for automation. This is also why automation in the private banking segment is relatively high,” he says.

More trades in smaller sizes

Another interesting trend in the private banking community is that while the number of individual trades is increasing, the size per trade is getting smaller.

“We see more trades, but smaller trades, which also gives a clear demand for automation and makes it easier to demand to automate this flow. And the reason for this is sometimes you really have big flow days from discretionary portfolio mandates which tend to be smaller tickets,” Tham explains.

In addition, private banks are also expanding their client segments from the larger ultra-high-net-worth (UNHW) clients who typically trade in large ticket sizes to the lower-ranking client segments which trade in smaller amounts.

In the past, a private bank looked at a UHNW client with US$20 million of assets under management or above. Now, the big global players extend the business to the mass affluent segment, or clients with US$2-5 million in assets under management. And having these clients means having many more orders to trade.

RMs need trading desk data

The growth in demand also comes from relationship managers (RMs) who service these clients.

“Ten years ago, it would have been impossible to give a good reliable reference price of a bond. In equities, you take out your cellphone, you look up a stock, you have the price of the exchange – easy, done. But for fixed income, it’s always been more difficult. When you think about the whole private banking investment decision chain, it starts with the relationship manager, and then when the order hits the trading desk, they do the implementation of the investment decision,” Tham says.

Since fixed income trading is an OTC market, the trading desk has all the relevant market data, but the need for the market data is felt even more by the relationship manager who provides the client with investment advice.

One way of making data on the trading desk more accessible to RMs as well as to enhance execution for traders is through a platform that provides tools for execution management, data liquidity, etc.

As an international financial technology company that operates an electronic trading platform for fixed income, MarketAxess has experienced 78% annualized growth in its Hong Kong-based trade volume.

This is because Hong Kong traders demand new and innovative ways to make trades more efficient, effective and transparent. These traders also see the benefits of new trading technology such as automation and big data, and are keen to learn more and implement them, just like their counterparts in Europe and the United States, Tham says.

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