COVID-19 work-from-home requirements accelerated the shift of European swaps trading to electronic systems last year. Now, e-trading is getting another boost as buy-side firms turn their attention back to trading-process improvements put on hold due to the pandemic.

European swaps markets have long led the world in electronic trading, and the global pandemic moved the market even further in the direction of e-trading. Two-thirds of the buy-side firms participating in a new study from Coalition Greenwich increased their use of e-trading last year.

*New #GreenwichReport by @kmcpartland* The Evolution of the European Swaps Market https://t.co/VziW35LlIl via @CoalitionGrnwch

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Overall, buy-side firms now execute 45% of their interest-rate swaps electronically on a dollar duration (DV01) basis, with the majority done via Tradeweb. More than half of firms expect that share to grow again in the year ahead.

“Several factors came together to promote e-trading last year, including work-from-home, the upcoming Libor transition and the fact that MiFID II requires that certain products trade electronically,” says Kevin McPartland, Head of Research in the Coalition Greenwich Market Structure and Technology group and author of The Evolution of the European Swaps Market. “But another tailwind is the simple fact that buy-side firms are realizing the benefits of trading electronically.”

The biggest driver of e-trading usage and growth last year was market participants’ desire to improve the trading workflow, particularly from a post-trade perspective.

Protocol Innovation Opens Door to New Growth
Protocol innovation will also play a role in bringing more activity to the screen. The European swaps market is still largely an RFQ market and on average, study participants executed 72% of their trading volume using the RFQ protocol. However, list trading has grown notably in other fixed-income markets and is picking up in European swaps.

“Protocol innovation not only supports more e-trading of those products that are already on the screen, but it also opens up the window for products once seen as un-electronifiable,” says Kevin McPartland. “Looking ahead, buy-side traders see the biggest potential for e-trading growth coming from diverse areas like asset swaps, swaptions and emerging markets.”

Source: Coalition Greenwich