On January 3, MBS Source, a popular US electronic trading firm, revealed that its trading activities saw significant growth from the period of January 1, 2021, to November 30, 2021, when compared to the same period in 2020. The growth demonstrates an increasing interest in structured products among customers. For the period highlighted above, MBS Source witnessed over 100% growth in the number of its customers and a 180%+ increase in its trading volume.
Mihai Szabo, the CEO and Founder of MBS Source, talked about the development: "Structured products such as RMBS, CMBS, ABS and CLOs are among the last market segments to adopt electronic trading. Both sell-side and buy-side participants recognize the advantages of sourcing and trading electronically over the more traditional email and phone call workflows."
According to the annual report by MBS Source, the number of firms participating in electronic trading rose over 100% for both buy-side and sell-side firms.
The Rise of Electronic Trading
The development by MBS Source comes at a time when electronic trading companies have become an increasing force in financial markets. Such companies engage in high-frequency trading using advanced computer algorithms. In addition, they serve as market makers, thus offering trading services for investors, which assist in promoting market liquidity. Some of the major firms participating in the electronic trading landscape, include Two Sigma Investments, Wolverine Trading Company, Virtu Financial, Citadel Securities, Jane Street, Susquehanna International Group, among others.
Market analysts say that electronic trading companies account for about half of the equities trading volume in the US. The super-fast speed with which computer algorithms can sort data enables them to take advantage of unique arbitrage opportunities. Such programs can spot price discrepancies between securities and make profit from price fluctuations. Arbitrage strategies can take various forms, such as global macro arbitrage, merger arbitrage, volatility arbitrage, events arbitrage and index arbitrage.
However, the popularity of arbitrage strategies has faced a number of challenges, including regulatory scrutiny and risks associated with software malfunctions. In 2012, Knight Capital Group, a US global electronic trading firm, almost became bankrupt after it lost $440 million within a single hour due to a trading glitch caused by software design faults. After the horrific incident, market regulators imposed increased risk management obligations on algorithmic electronic trading companies.
