Despite continued liquidity shortages in many global fixed-income markets, corporate bond execution venues and offerings that were a mere idea a few years ago are finally consolidating and starting to bear fruit—making it easier for investors to execute certain trades.
However, don’t expect the corporate bond market to follow the same path as equity markets, where regulations helped spur the aggregation of new electronic trading platforms into something that—from the investors’ point of view at least—resembles a single virtual pool of liquidity.
A new report, Innovations Ease Corporate Bond Trading, from Greenwich Associates suggests that the largest operators of electronic trading venues for corporate bonds see little benefit to their liquidity being aggregated, since doing so would put them in more direct competition with other liquidity on a single screen. As a result, proprietary user interfaces (UI) for each trading venue will remain the primary point of entry for investors into electronic bond-market liquidity.
“Native front ends bring with them a user experience (UX) that is perfectly suited for all of the features and functions within the given platform,” says Kevin McPartland, Head of Market Structure and Technology Research at Greenwich Associates, and author of the new report. “By contrast, an OMS or EMS provides an aggregated view, but they must normalize all liquidity pools to create a single interface.”
Currently, only 2% of buy side traders utilize either a third-party or internally built standalone EMS to access the corporate bond market. The vast majority of traders rely on the front ends of the individual trading venues they use—a finding that reinforces the point that the user experience will remain an important factor in the competition among electronic corporate bond trading venues.
Easier to Execute Small Trades, Larger Orders Still Challenged
An expansion in all-to-all trading, coupled with an array of additional technical innovations, is making trading corporate bonds easier for the buy side. Two-thirds of investors participating in a recent study from Greenwich Associates say executing corporate bond orders of $1 million or less is “easy” or “extremely easy” — up from 56% the year before. This is a positive sign, given recent Greenwich Associates research that found 90% of credit investors still feel liquidity issues are hurting their ability to execute their strategies effectively.
Although it’s getting easier to complete these relatively small trades, executing orders above $1 million in notional size still presents challenges, and orders of $5 million and up remain particularly tough to execute. Large and illiquid orders are, in fact, the main reason buy-side bond traders look toward newer trading mechanisms today.
Helping to match those buyers and sellers is the holy grail of corporate bond technology firms. “By cracking the code for matching large and often illiquid bond trades so that information leakage and time spent searching for liquidity is minimized, these firms aim to both control the corporate bond market and rake in profits,” says Kevin McPartland.