Free Site Registration

Buy Side Juggles Efficiency and Workflow in Search for Corporate Bond Liquidity

Traders Magazine Online News, August 3, 2018

Ivy Schmerken

Corporate bond investors are seeking operational efficiencies on their fixed income trading desks to lower costs.  As the search for bond liquidity across a fragmented credit trading marketplace remains a priority,-side firms are grappling with two distinct workflows – voice-based and electronic – in the $8 trillion corporate bond market.

A new report by Tabb Group finds that electronic trading venues have developed tools targeting the voice-based segment of credit trading by layering on efficiency mechanisms and data-driven tools. Some of the trades executed via voice brokers are being processed electronically through electronic tools.

A shift toward automated trading of corporate bonds has been unfolding over the past several years and is firmly embedded in the daily workflow of asset managers.

In “Making the Connection: The Electronic Shift in Legacy Bond Market Workflow,” Tabb Analyst Colby Jenkins maintains that because of the growth of electronic trading in US corporates, “liquidity is no longer the elusive target that it was three years ago.”

Since the financial crisis in 2008 ended, the average daily notional volume traded in corporate debt has increased from under $20 billion in 2009 to roughly $30 billion in 2018. Corporations issuing debt have been taking advantage of low interest rates to borrow heavily. In 2017, $1.6 trillion in new issuance entered the market compared to $1.05 trillion in 2010.

With this increase in liquidity, trades that are smaller than $1 million – just under the threshold for round lots – have become easier to execute. At the same time, asset managers are growing more comfortable executing larger trades electronically on venues such as MarketAxess.

About 20-23% of the corporate bond market is currently traded electronically when investment grade and high yield bond are included, according to Tabb.  The financial markets research firm estimates that investment grade corporate bond trading will reach 24% in 2018.

While significant uptake has occurred in the electronic evolution of corporate bond trading, the vast majority of buy- side traders still prefer voice trades for the larger, most difficult trades.  “For the largest size trades, liquidity still comes at a premium and relationship-based, voice trading is still far and away the preferred mechanism for getting size done,” states the report.

About 75-80% of notional volume in corporate bonds is still conducted as voice trades, even if they are eventually processed electronically, states the report. Tabb estimates that over the next decade, that percentage might drop by another 5 or 10%. But firms are facing the challenge of managing electronic and voice- based workflows.

“A lot of the electronic adoption we’re seeing is simply making things more efficient. Liquidity is not the issue it was before,” said Jenkins, in a follow-up interview.

“It’s just the allocation and confirmation of how people go about submitting to these electronic systems and it makes for a more streamlined approach,” said Jenkins. “Electronic processing of trades, whether traditional voice or executed electronically, is what people want,” he said.

Efficiency Matters

With the growth of fixed income ownership, institutions are seeking ways to scale their desks without increasing costs.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.