James Wallin, senior vice president at AllianceBernstein, said the fund manager is making progress on developing data aggregation and risk tools to make the fund manager less dependent on dealers in the bond market.

Wallin spoke on a panel at the Association for Financial Markets in Europe’s Market Liquidity Conference in London yesterday. There have been significant changes in the structure of secondary corporate bond markets. Dealers have decreased market making due to capital constraints and new regulations and shifted to more of an agency model where they match both sides of the trade before committing capital.

Wallin said: “Banks’ market-making ability has changed so we are looking to data aggregation and sorting to source liquidity. This would have happened 10 or 20 years ago if big banks had not got into the market in the 1990s and given the buy side the luxury of relying on big pools of liquidity.”

The Financial Conduct Authority, the UK regulator, said this month in a report on UK corporate bond liquidity that since mid-2014 some firms have experienced an increase in the amount of failed or rejected trades, an increase in the amount of time it takes to fill an order, a decline in dealer quote rates on electronic bond trading platforms, and a slight widening of some quoted and effective bid-ask spreads.

“Taken together, this indicates that trading conditions have become somewhat more difficult over the past 18-24 months,” added the FCA. “However, overall the evidence indicates liquidity is still relatively healthy compared with the entire 2008-2016 period.”

Wallin said AllianceBernstein is looking at new tools to assess the fungibility of bonds from different issuers i.e those that have the same risk profile.

“We want to locate certain securities quickly and efficiently and execute on our investment and risk thesis without sticking to particular issuers,” he added.

Wallin continued there will need to be an increase in all-to-all trading in which the buy side also makes prices for bonds.

Gareth Coltman, head of European product management at MarketAxess, said at the AFME conference that all-to-all trading has grown to 20% of activity on the electronic bond trading platform, but 80% of activity still relies on dealers.

Wallin said: “The buy side will be key to making prices and MarketAxess is a shining example of that change in market structure.”

The FCA report found that the quote rate from dealers has declined from 60% several years ago to 52% by mid-2016 which could imply dealers are now less willing or able to provide quotes to clients. However, another reason could be the introduction or more widespread use of additional innovative functionalities designed to improve execution rates on the electronic platforms.

“This includes, for example, providing ‘axe’ information about specific dealers (i.e. which ones already have a position in a given bond and are thus more likely to trade it),” added the FCA.

Lawrence Pierson, managing director, head of Market Hub at Banca IMI, said at the AFME conference that the decline in bank market making opens the door to agency trading. The Italian bank created Market Hub at the start of 2008 after the original MiFID rules went into effect in November 2007 to provide multi-asset class electronic execution and voice brokerage.

“We know how to trade fragmented markets and have had success in corporate bonds with auctions and dark pools,” said Pierson.

Wallin added that AllianceBernstein executes about 80% of bond trades electronically by number but this equates to only 20% and 30% by dollar volume. “When you are trading above $5m or $10m in the bond market then knowledge has great value,” said Wallin. “Regulators do not understand how valuable that is in comparison to equities.”

Wallin continued that asset managers are very concerned about how to anonymise large blocks while giving enough information to their counterparty. “It is about how to let the cat out of the bag without the cat running away,” he said.