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Next Steps in Bond Trading: All-to-All Matching Catching on?
Traders Magazine Online News, April 10, 2017
Corporate bond trading platforms are in the news again.
Platforms that have launched innovative all-to-all trading protocols are attracting buy-side firms to their venues. Despite skepticism a few years ago that all-to-all platforms wouldn’t attract liquidity, platforms like MarketAxess with Open Trading and Liquidnet’s have gained traction on the buy side and increased their volumes over the past year.
“I’d say that all-to-all trading has really been a big driver of 2016. I think when we look at our volumes, you’d see that all-to-all trading has had a big impact on us,” said Amy Koch Flynn, global head of fixed income trading at Standish on a TABB Forum video, “The Limits of Electronic Trading in Fixed Income.”
As a result of regulations that caused the dealers to reduce their balance sheets and retreat from market making, MarketAxess developed Open Trading to allow buy-side firms to trade with one another or with the sell side.
“Open Trading is a term describing the ability of clients to tap into the broader MarketAxess liquidity network, which could be other buy-side clients or dealers they don’t have as direct counterparties,” said Gareth Coltman, head of European product management at MarketAxess. Under the EU’s MiFID II reform going into effect on Jan. 3, 2018, asset managers will need to demonstrate best execution to their clients and collect all the necessary data points.
In the second half of 2016, MarketAxess reported that over 270 asset managers and 40 banks were using Open Trading in Europe. Asset managers provided half the liquidity on Open Trading during the second half of 2016. Among the new protocols launched in June of 2016 was Private Axes to let the buy and sell side anonymously advertise their interest and negotiate block trades without market impact.
Liquidnet’s blotter sweeping technology and centralized network of natural liquidity has caused institutions to prioritize connectivity to its income trading platform.
Since launching in September of 2015, Liquidnet’s all-to-all fixed-income platform has increased to $7 billion of order flow per day. In January of this year, it had more than 230 different institutional firms and over 165 users.
However, it’s not time to celebrate yet.
While the corporate bond market has been expanding over the past eight years to more than $8.5 trillion in notional value, most of these bonds do not trade very much. Insurance companies, pension funds and mutual funds hold these bonds but can have a herd mentality. “If there’s a declining credit, or volatility, these markets on electronic platforms are not there for you. So, I think that that’s a misnomer that people don’t truly understand,” said Koch Flynn.
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