Too Much Choice in Fixed Income Trading

What sits behind these changes is a tail-off in dealer-generated liquidity. In bond markets, which have inherent illiquidity, the impact has been most noticeable.

Trading venues have launched across fixed income markets in order to fill the void created by the concentration of market makers on the most liquid securities. From rates to credit, cash and derivatives, more than 100 venues have been created in the last few years. Some of these are using genuinely innovative new trading models, particularly all-to-all which has proven successful in the credit space, but no matching mechanism can make up for a lack of buyer / seller to your trade.

The inherent problem is the number of non-fungible instruments traded in any market. While government bond markets only have one issuer, corporate bonds have an enormous range, as do municipal bond markets. Each of these issuers can issue debt at any point in time as they need. The bonds issued have a variety of tenors, resulting in an enormous universe of potentially tradable instruments. These are divided up across investment grade, high yield, and emerging market debt for investment purposes. 

Every fixed income instrument set has a cluster of successful – and many less successful – venues with the potential to help connect buyers and sellers. For the buy-side trader, this would appear to be a positive route to finding liquidity. Over the last year, dealers have been moving back into these markets. For the sell side, fitting into this new landscape can create a wealth of execution options and ways to reach new clients.

However, the sheer number of platforms is paralyzing. For each venue, data feeds need to be analyzed, implemented, and tested. Connectivity needs to be set up and legal agreements need to be reviewed and negotiated in order to start engaging with any one venue. Data then needs to feed seamlessly onto the trading desk, whether it is buy side or sell side, and preferably without occupying too much screen real estate.

Larger markets which operate a request-for-quote (RFQ) trading model do not display prices. Buy-side firms have to reveal their interest to a certain number of counterparts in order to get a price. Many buy-side firms are building data feeds that allow them to understand where a price should be on a pre-trade basis, so they can minimize information leakage. That is an additional cost.

These mounting expenses neutralize the advantage that platform competition can confer.

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

• Fixed Income
• Insights/Viewpoints