The network effect: creating new opportunities for emerging markets bond traders

Craig McLeod

Today’s emerging market (EM) traders are different to just a few years ago, with an increasing need for information, access and liquidity for a broader spectrum of emerging markets to meet the investment profile of portfolios.

Electronic trading has created liquidity and information opportunities for those trading EM debt, in both hard and local currency. Billions of data points combined with innovation enables dealers and investors to be connected like never before, combining liquidity from both domestic and international participants interacting with each other daily to uncover more liquidity. While large international investors remain critical to global EM debt flows, a network of on-and-offshore investors underpin the ability to maximise liquidity and minimise trading cost by centralising what was commonly seen as a distributed liquidity landscape.

MarketAxess has been at the forefront of this change. As one of the leading venues for trading emerging market debt, it sees much of the growth going on in this asset class. USD562 billion was traded globally in EM across MarketAxess in 2020, distributed across hard currency and 26 local debt markets – our EM business has grown at 31 percent CAGR over the last five years.

This momentum will continue over the next few years. To address key market challenges (fragmented liquidity, efficient execution and increased automation) through technology innovation.

Piecing together fragmented liquidity

Inventory is increasingly shifting to the hands of traditional investors and domestic participants, a symptom of an asset class which has grown 200 percent in 10 years at a time where regulators have constrained bank balance sheets globally – a liquidity challenge. MarketAxess has systematically built a marketplace underpinned by a network. Creating the broadest range of emerging market debt streaming liquidity from 26 local EM currencies across LATAM, CEEMEA and APAC – with now over 1,600 EM trading participants – both buy-and-sell-side.

Unpredictable and rapid changes in liquidity conditions also cause challenges. That’s why solutions that help traders make intelligent decisions across the deepest liquidity pool, empower them to have impact in their investment process. Solutions like Smart Select take a data-driven approach to help buyside investors select the “optimal” set of dealers, for their liquidity needs.

Levelling the playing field

Covering these markets on our platform isn’t the only thing that’s important. Building and supporting an infrastructure, breadth of trading protocols and global marketplace that fosters liquidity and drives a more efficient and active market is also critical.

Open Trading™ is the world’s largest fixed income all-to-all marketplace, allowing market participants access to liquidity globally outside of their usual dealer-dealer channels. A local bank or buyside investor in Thailand can anonymously transact with any one of the 1,800 participants on our Open Trading network. Through this innovation, we routinely see traders in Cape Town transacting with dealers in Mexico City or Lagos with Mumbai.

Innovation is levelling the playing field for participants, and Open Trading represented 45 percent of emerging markets hard currency volume last year for MarketAxess. Introducing significant cost savings versus the next best price from a traditional liquidity provider, bringing back alpha to the investment funds of our clients.

Another innovation is Request-for-Market (RFM), a two-way market at the fingertips of our users. The fastest growing protocol in the emerging market debt landscape in recent years, which has made the transition from emerging market rates, to emerging market credit. RFM has allowed traders to risk transfer large block orders electronically, keeping their intended trading side discrete, enabling true and fair price information on a competitive landscape while benefiting from all the efficiencies of electronic trading.

Switch Trading is another solution where we have seen immediate momentum in H2 2020 where you can simultaneously buy and sell short and long durations in 26 local currencies. Not only will you save valuable time by making only a single trade, you’ll experience improved pricing from a wider variety of participants in the broadest global liquidity pool. We have seen increasing demand across all local emerging market jurisdictions.

A complete toolkit

The ability to cater for the diverse liquidity and strategy needs of market participants is essential, and we have developed our offering according to the demands of sophisticated traders globally.

There is huge global momentum within automation, and this has been widely adopted in emerging markets in the past 12 months for orders requiring a lower-touch approach. In 2020 we saw a rise of 159 percent in trades being submitted using auto-execution protocols. Through better pricing and tools that automate trading flows, investors are now able to reach more deeply and broadly into emerging markets.

A new era for emerging markets

It is a new era where emerging markets debt isn’t just traded exclusively out of New York, and London, but directly by onshore participants. Last year we saw more trading activity done from locations such as Cairo, Sao Paulo, Johannesburg and Warsaw.

The number of regional onshore participants trading local debt has exploded by 50 percent this past year, supporting the move to electronic trading domestically. In APAC, we saw a 90 percent increase in trading volume YoY in 2020, and a 13 percent rise in the number of APAC-based firms using our platform.

This is a sign of things to come. With the right tools and the network, there is a newfound potential to transact with every corner of the world. 


Craig McLeod (pictured), Head of Emerging Markets, MarketAxess
Craig McLeod joined MarketAxess in September 2018 as head of the firm’s emerging markets business. Here he has been responsible for helping grow what is now the broadest pool of emerging market liquidity in the world, across both hard currency and local market bonds. Prior to joining MarketAxess, he was the head of global fixed income and FX trading at Investec Asset Management, a role in which he was twice awarded the title of Trading Rising Star by several notable trade publications. Craig has been a senior credit trader, portfolio manager and leader of fixed income trading operations in the US, Europe, the Middle East and Asia. He is an expert in global bond trading trends, technologies and investment strategies.