The Role of Technology in Managing Fragmentation in Markets

Technology is increasingly serving as a counterbalance to mitigate the impacts of regulatory-driven market fragmentation in APAC, writes Tradeweb’s Jennifer Keser.

Amid the Covid-19 pandemic, countries in Asia have moved forward in internationalising their financial markets, especially in the fixed income space. However, market fragmentation remains an important topic in the region, given that each jurisdiction has its own set of rules governing trading and other investment activities. To understand what is at stake here, it is necessary to grasp what drives regulation and how it can inevitably lead to diverging standards between markets.

The introduction of new regulations can be driven by unexpected events – such as the last financial crisis, the UK’s decision to leave the European Union, and the current global pandemic. While we may not be able to influence such events, we can improve our mechanisms to better adapt to any unforeseen or foreseen change – be it through greater coordination, flexibility in regulatory policies, or in the timing of implementation.

 Technology facilitating Asia’s outward attitude

Technological innovation and adaptation have helped reduce fragmentation. Trading platforms can create a uniform experience for international investors, who typically prefer to have the same functionality across markets. For instance, Singapore’s decision to seek equivalence on a derivatives trading obligation regime with the US and EU should be seen as further encouragement that efforts are being made to reduce fragmentation.

As market participants operate and trade in a global market, there is definite similarities in the regulations used across countries and regions, just as there are differences. While some local markets are more mature and open, others are growing but are more closed, particularly in Asia. This is evidence of a natural fragmentation based on diversification of markets, but also of overarching local market principles relating to financial stability, systemic risk, transparency and investor protection.

While a crisis like Covid-19 may have caused us to move more inward, it has also made more of us leverage the same technology across jurisdictions. Ironically, the world became more globally connected (smaller) as a result of more of us working the same way in different parts of the world.

Tradeweb has witnessed a sustained trend towards electronic trading and digital workflows since the beginning of last year. In the first quarter of 2020, the platform averaged over USD 897 billion in trading per day – a record at the time – which is 39 percent more than was seen in the same quarter a year earlier. This phenomenon has continued into 2021; average daily volume in the first quarter reached an all-time record of USD 1.06 trillion, up 7 per cent year over year.

Since March last year, “work from home” arrangements fostered even more behavioural change and led to two interesting trends. Firstly, higher e-trading adoption was evident across products and protocols. We set volume records in nearly every asset class during the last year, including the ones that are typically the least electronic.

Secondly, clients deepened their engagement through technology they may not have used before. For example, they turned to solutions that allowed them to package bonds and execute them in a single transaction with a single counterparty, helping to reduce the need for daily trading, speed up risk transfer mechanisms, and optimise their balance sheets.

The role of electronic trading

Although it is natural for a regulator to do what is best for its local markets, especially in a time of crisis, it is clear that rules can be created with a spirit of coordination and openness. Market fragmentation in itself cannot be avoided, but the degree to which this fragmentation occurs, and the level of communication and cooperation that exists to mediate it, is something that policymakers, supervisors and market participants should all strive for.

Electronic trading platforms also have a role to play – namely to facilitate access to liquidity regardless of market conditions. Last year was proof that they can function even during prolonged periods of market stress, helping to ensure safe, orderly and efficient markets.

Looking ahead, we expect technology will continue to unlock new ways for market participants to conduct their business, and to help them overcome present and future fragmentation challenges, whether regulatory or driven by other factors.

Jennifer Keser is Head of Market Structure & Regulation at Tradeweb.

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