Technology is the key to driving the fixed-income brokers forward – pushing the sector from a manual opaque market into a powerhouse to rival other asset classes.

And that will push trading too, according to the latest report from market consultancy Greenwich Associates.

The top six U.S. government bond dealers have an aggregate annual technology budget of $26 billion. That astounding figure illustrates the extent to which technology prowess has become the key determinant of success or failure for banks competing in capital markets, reports Greenwich. In their new report, “The Technology to Succeed in Fixed-Income Trading,” they write that global and regional bond dealers that made the biggest IT investments over the past decade have also achieved the highest levels of market share growth.

Growth will come amid the current lingering low rate and low volatility environment which has hurt dealer profit margins, and brought a worldwide slowdown in trading activity has depressed volumes. As a result, fixed-income revenues have fallen while profitability per trade is shrinking. Yet even in this cost cutting environment, continued investment in fixed-income technology is key.

“While individual dealers have little control over the total market volume, technology investments that increase distribution while reducing costs represent a critical competitive advantage,” said Kevin McPartland, Head of Market Structure and Technology Research at Greenwich Associates, and author of the new report, which traces the impact of technology in fixed income, and analyzes how dealers are employing specific technologies in both client-facing functions and hedging.

The consultancy interviewed 173 fixed-income investors from Q3 2016 to Q2 2017, in addition to top-tier broker-dealers and liquidity providers, to better understand the role of technology in the dealer/client relationship in the United States. Conversations examined how the buy-side/sell-side relationship is evolving, the technology currently used by sell-side trading desks and expectations for the future.

McPartland added that the fact that smaller dealers cannot afford the same level of expenditure maintained by the largest banks does not preclude them from realizing these important benefits.

“Whereas real-time pricing and automatic hedging were, until recently, only available to those with big technology teams and budgets to build them in-house, third-party providers are now paving the way for a longer list of fixed-income dealers to up their game—and profitability,” McPartland said.

A strong technology platform will be even more important to success in the future, given the increasing competition from new nonbank liquidity providers whose value proposition rests largely on their use of cutting-edge technology. Today, one in five government bond investors and one in four interest-rate derivative investors either trade with or plans to gain access to nonbank liquidity providers, demonstrating the impact technology has had on the business.

“Spending billions on new technology does not guarantee growth, as having right people and process in place to capitalize on the new capabilities remains critical,” McPartland said. “Nevertheless, the next generation of fixed-income dealers will succeed only with technology at their core.”

Matt Hodgson, CEO of Mosaic Smart Data told Traders Magazine that technology has already had quite a significant impact on fixed income productivity. However, that hasn’t really fed through into overall lower costs.

“A big part of the reason for this is that, as technology brings down certain costs, market data is becoming increasingly valuable (and therefore more expensive) cancelling out much of the cost saving,” Hodgson said.

Also, with the rise of technologies automation technologies, such as artificial intelligence, machine learning and quantitative trading, data is only going to become more important.

“Addressing this must be one of the key technology focuses for the fixed income market. Dealers have huge amounts of data which is proprietary through the normal process of doing business, but many of the insights in that data are left untapped,” Hodgson said. “Trade data is spread across desks in different databases and held in different formats, if it was bought together into one secure, standardized data lake, it could really speed up their big data adoption and slash the cost of buying in market data at the same time.

Those banks which invest properly in their data technology, Hodgson argued, and create the right foundation of properly aggregated and normalized data within the business will see data analytics become the cornerstone their competitive advantage.

“With the leaps forward that we are seeing in machine learning and analytics more broadly, the banks can see the potential that data holds to improve the performance of their trading desks, picking out trends and patterns that no human could compute at the speed of thought.”