When the market makers realized that their business model needs a reconsideration of the mitigating risk situation, the ideas of the electronic or digital mode of trading sprouted. They started thinking outside the view of the traditional trading methods to find out a way to make consistent and targeted profits. However, the old methods are still in use and you need to know the basics of how the trading process was actually conducted.
This review documents the way by which the trading platforms facilitate trading by improving features like
- market transparency
- making the market participants contribute and access pools of liquidity
The trading platforms associated with fixed income markets
The term virtual trading deals with the various ways to conduct trades electronically. So, to fully understand the situation of the shift from those voice-brokered trading patterns to digital trading and its real impact on market making, it is encouraged to differentiate the trading platforms in accordance to how and which type of investors provide the real liquidity.
- The Order-driven type
In this trading scheme, usually, the trades are complemented on a central limit order book, where the market investors register and place orders secretly. Even though such trading platforms rely much on the designated market makers, who promise to provide a minimum value of quotes, any of the trading interested people can also contribute their means of share to the market liquidity by placing a limited number of orders on the previously defined central book.
- The Quote-driven mode of trading
While considering the mode of quote-driven markets, the dealers occasionally distribute quotes only upon the request of a client. Still, this mode is prevailing in the existing bond markets. Alternate to the order-driven type, here only the dealers are chosen to provide the market liquidity. Thus, this makes a situation where the clients have to depend on the immediacy services.
Even the dealer platforms can be classified into
- The One-dealer platforms
These are the extension of the traditional type based on voice brokerage and they require the individual dealers’ quote on screen for the client to access it. This type can reduce the transaction cost by directly reducing the operational cost.
- The Multi-dealer mode
This allows the simultaneous accessing from different dealers. Here the client gets the benefit of favorable rates creating competition among the dealers. This can enhance market liquidity and transparency.