After lagging behind other asset classes for years, the corporate bond markets are finally moving toward a more automated and electronic execution model. With Citi, UBS, Goldman Sachs, and Morgan Stanley all now offering electronic trading systems for corporate bonds, it is increasingly clear that the market adoption of electronic fixed income trading solutions is well underway. The year ahead is one that will see the continuation of this shift in sentiment, in addition to the evolution of some key issues affecting the overall market.
Average trade sizes are declining as a result of this electronic evolution. Since 2009, the average daily trading notional volume has grown 33% for trade sizes between $100,000 and $1 million. In contrast, daily notional volume between $1 million and $25 million has only increased by 6% over the same time period, according to the TRACE 2011 Fact Book’s Transaction Information Corporate Bond Tables. Better trading technology is bringing much needed efficiency to bond trading and allowing the buy side to break down round lots into smaller “odd lot” transactions.
While large banks and broker-dealers will continue to be very relevant in market making, the concentration of liquidity is shifting from larger firms to more regional dealers. Apart from the widely discussed regulatory reform restraining bank balance sheets, electronic trading is enabling middle-market and regional dealers to step up as replacements. According to TRACE (2011 Fact Book, Participant Information Corporate Bond Tables), the top 10 most active dealers have seen their market share decrease 6.9% from 2009 to 2011 while everyone else has increased their market share by the same amount.