The Shift to Electronic Trading in the MBS Market: Trends, Challenges, and Opportunities

The mortgage-backed securities (MBS) market continues to demonstrate robust activity, securing its place as one of the largest and most liquid financial markets in the world. According to SIFMA, in Q1 2025 total MBS issuance reached $414.3 billion, marking a 33.3% increase year-over-year. 

Despite its prominence, much of the MBS market still operates through traditional trading methods, such as phone and chat-based transactions. However, the industry is now undergoing a fundamental shift toward electronic trading, a move that promises to improve efficiency, transparency, and analytical capabilities. In today’s blog, we cover the key factors driving the transition to electronification of the MBS markets, the measures financial institutions must take to prepare, and what opportunities may lie ahead.   

The Case for Electronification 

There are several key factors driving the movement toward electronic trading in the MBS market. Below we offer discussion on each of these points.  

Data Challenges and Legacy Workflows: Buy-side traders have long struggled with fragmented and inadequate datasets, multiple incoherent platforms, and legacy systems that inhibit efficiency. These challenges make it difficult to quickly analyze and act on trade opportunities. Greater access to more structured, digitized datasets allows for faster and more reliable insights, reducing inefficiencies that slow down trade execution. 

Cloud Computing: The rise of cloud-based solutions enables traders to host and analyze data more efficiently. With the ability to process large volumes of complex mortgage data across multiple cores, cloud computing is helping firms execute faster, more informed trading decisions. It also allows for greater scalability, enabling firms to rapidly adjust their computational resources to accommodate peak trading volumes. 

Automation and API Integration: The shift to electronic MBS trading requires firms to minimize manual interventions and ensure seamless data flow across systems. Products like Numerix’s PolyPaths streamline this process with workflow automation and API integrations, enabling straight-through processing and more efficient trade lifecycle management. This reduces operational risk while enhancing overall efficiency. 

Enhanced Transparency: Traders require real-time data to assess price-yield relationships and execute trades with confidence. Electronic platforms help aggregate and normalize data from sources like Bloomberg, ICE, and Tradeweb, ensuring a more transparent and liquid market. The ability to analyze pricing trends and risk exposures in real time enables traders to make better-informed trading and risk decisions. 

Current State of Electronic Trading  

According to a Tradeweb and Coalition Greenwich study, over 75% of ABS, CMO, specified pools, and CMBS trades are still executed via phone or chat. The complexity of structured mortgage products, with their intricate cash flow structures, has made electronic adoption slower than in other fixed-income markets. However, as technology advances, more firms are adopting electronic workflows to streamline execution and risk management. The numerous benefits of electronic trading, including greater liquidity, faster price discovery, and reduced transaction costs, make it an increasingly attractive option for market participants. 

Challenges to Adoption 

While the benefits of electronic trading are clear, challenges remain. One major hurdle is data integration. Ensuring seamless connectivity between various structured product datasets continues to be a significant obstacle for many firms. Legacy systems often lack the necessary infrastructure to support electronic trading workflows, requiring costly upgrades or replacements. Additionally, market resistance to change poses a challenge, as traders accustomed to traditional methods may be hesitant to transition fully to electronic platforms. Familiarity with voice trading and the perceived complexity of electronic trading solutions may slow adoption. 

Another key issue is customization. Unlike standardized Treasury securities, MBS products require tailored analytics. PolyPaths, for example, offers a customizable framework that allows firms to plug in their own models for prepayments, defaults and other risks— a feature that distinguishes it from its competitors. However, customization comes with challenges, as firms must invest in technology and expertise to effectively implement and manage these models. 

Role of Advanced Analytics 

It’s clear that the transition to electronic trading places a premium on advanced analytics tools, which are essential for pre-trade analysis, risk assessment, and regulatory compliance. Products like Numerix’s PolyPaths empower traders with features that include: 

Pre-trade analytics: Understanding the price-yield relationship before execution. Traders can simulate various market conditions and adjust their strategies accordingly. 

Portfolio risk measurement: Assessing exposure and stress testing under various scenarios. This helps firms evaluate how different market events could impact their portfolios. 

Robust Analysis: Enabling quick, on-the-fly analysis with live market and security data, while supporting automated routines to evaluate securities throughout the trade lifecycle. This ensures consistent, timely insights for more informed decision-making. 

Cloud-based computational power: Running complex analyses faster and at scale. This is particularly important for analyzing structured products, where cash flow modeling and scenario testing require substantial computing resources. 

Seamless data integration: Aggregating and normalizing data from multiple sources to improve decision-making. The ability to pull data from various market sources into a single platform enables firms to gain a comprehensive view of their positions and exposures. 

Looking Ahead: The Future of MBS Trading 

The push toward electronification is set to accelerate, driven by regulatory demands, technological advancements, and the increasing need for efficiency. Cloud computing, AI-driven analytics, and improved data integration will play pivotal roles in shaping the future of MBS trading. Platforms like PolyPaths will continue to provide buy-side firms with the analytical tools they need to navigate this evolving landscape. 

In an industry where speed, transparency, and precision are paramount, electronic trading represents the next frontier for the MBS market. As adoption grows, firms that embrace this transition will be best positioned to capitalize on market opportunities and enhance their competitive edge.  

Numerix’s PolyPaths can serve as a powerful enabler for firms as they transition to electronic trading of MBS investments. Learn more about PolyPaths here.