Innovations in Trading and Technology (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.
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1 Comment to "Electronic Corporate Bond Trading’s Time Is Now":
hoya1989
18 January 2013
Market participants continue to "discuss" possible solutions for various problems that are seemingly plaguing the institutional corporate bond market, including lack of liquidity, decreasing ROIs, execution costs, and access to fragmented liquidity pools. The big question remains, "when" will the market actually move forward to do something about it?
Dealers have begun to address the problem of the shifting environment by developing single dealer platforms designed at "improving" round lot liquidity. Theses "sessions" based platforms seek to leverage the information a dealer has regarding market demand, combine it with their ability to provide backstop liquidity, and connect buyers/sellers of specific issues while taking out the bid offer for the service. These platforms are initial steps in the right direction towards electronifying round lot corporate bond trading, but there is some debate over whether or not single dealer platforms actually are sustainable for the long term...and the question remains whether or not single dealer sessions-based trading offers limited liquidity to the buy-side (i.e., what are the increased benefits of having a multi-dealer sessions-based trading apparatus).
The time is ripe for the market to start acting and stop debating. Paralysis by analysis has long been the modus operandi of the market, and as Mr. Chuang suggests, we need to get on with the task of actually implementing solutions. iTB represents a breed of new players in fixed income e-solutions. Similar to the EMS evolution in equities, a single point of connectivity front-end that can enable institutional investors to connect to fragmented pools of liquidity brings a cost-effective search and execution solution that is sorely required.
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