Perfect Storm for Innovation
Billy Hult
Chief Executive Officer, Tradeweb Markets
Sea changes can be hard to spot when you’re living through them. Sure, with the benefit of hindsight, we can revisit Apple’s 2007 prediction that its new iPhone would “reinvent the phone” as a seminal moment in how humans interact with technology. Today we can stream the new movie Air on our iPhones to relive the fateful period in 1984, when an innovative sneaker endorsement deal would revolutionize professional sports. But as they are happening, the gravity of events like these can be overshadowed by the day-to-day work and distraction of doing our jobs.
Those of us working in institutional fixed income, derivatives and ETF markets have had a front-row seat to a number of transformative moments over the last three years. A combination of the global pandemic, near-constant volatility, technological disruption and breakthrough innovation has reprogrammed the way we work, realigned the way we confront new challenges and set us up for a period of truly profound change in how risk is transferred in our markets.
I believe we will see more trading innovation in these markets over the next five years than we’ve experienced during any period since these markets began to go electronic in the late 1990’s. There are many reasons for this, but let’s focus on four broad themes: structural changes to financial markets, electronic trading resilience in turbulent markets, technology and data as multipliers and the evolving role of the trader. While each of these is at a different stage and none is brand new, together they are a catalyst for serious innovation.
Structural changes to financial markets
For many years, asset classes adhered to the “stay in your lane” principle, but those days are behind us. Clients and dealers increasingly view risk transfer holistically, trading in and out of multiple asset classes all day long with as little friction as possible. For example, credit investors can now buy corporate bonds and instantly hedge interest rate risk via U.S. treasuries or emerging markets currency risk via FX swaps. Pools of liquidity are also becoming more connected, allowing a retail bond investor to find the other side of a trade even if it’s in the institutional or wholesale market. China’s Bond Connect has electronically linked the world’s second largest local bond market with the rest of the global fixed income ecosystem. And don’t forget about regulation, as we know there is more to come. As happened with Dodd-Frank and MiFID/MiFIR, expect more regulation in these markets to yield new and innovative ways to promote transparency and efficiency. Electronifying markets is what makes these innovations possible.
Electronic trading has proven its resilience in turbulent markets
Historically, market volatility caused fixed income traders to revert to the telephone, but increasingly we’ve seen electronic trading become stickier. Take, for example, the response of corporate credit markets to the March 2023 collapse of several major banks. During this period of extreme volatility and a frantic hunt for liquidity, electronic credit trading volumes held steady compared with March 2020. The same was true when traders responded to the UK Gilt crisis, the Russian invasion of Ukraine and countless other moments of extreme market stress. This continued pattern of once-in-a-lifetime stress events followed by swift, tech-driven responses that keep markets moving is a harbinger of a new wave of innovation.
Technology and data as multipliers
Technology is not the source of all innovation, but it does carry a big stick. Our business has always been about optimizing the balance between humans and technology, so a potential sea change like artificial intelligence (AI) and machine learning (ML) becomes an opportunity to recalibrate that balance and ask what else can we do for clients. One place where we’ve seen real impact has been pricing. At Tradeweb that’s meant using AI to create pricing data for less liquid markets such as muni bonds, calculating intraday Net Asset Value (NAV) for ETFs or even benchmark closing prices in European government bonds. We also use machine learning in selecting the right counterparty or dealer on a trade. Most of the recent AI debate has focused on generative AI, which we view as a powerful capability – but it’s still early days.
Evolving role of the trader
Trader skills and capabilities will continue to evolve as technology takes on more mundane tasks, increases efficiency and pushes humans towards higher margin focus. We already see traders who are quants, coders, even portfolio managers – and that evolution will continue. Even as technology creates more possibilities, often led by younger generations of digital enthusiasts, it has never been more important for traders to also be skilled relationship managers and even marketers.
The combination of these themes sets the stage for a period of massive transformation over the next five years. Some of these developments we’ve discussed have been with us for some time and others are more recent, but the perfect storm of these trends accelerating at the same time has created a powerful and exciting opportunity to reach new heights in trading innovation.
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