‘All-to-All’ Bond Trading Poised To Win

Shanny Basar

All-to-all bond venues will emerge as the winners in the shift to electronic trading in the bond market according to consultancy GreySpark Partners.

GreySpark Partners said in a report, The Bonds Electronic Trading Landscape 2017, that all-to-all bonds trading venues represent the eventual end point of the marketplace’s experimentation with new models. An all-to-all model allows multiple parties in a network to come together to trade rather than the traditional model of only banks supplying liquidity to the buyside.

“Trading for liquid, easily-priced instruments could eventually move entirely to exchange-like central limit order books,” added GreySpark. “The result of this change would be the eventual introduction of new price formation protocols for less liquid, hard-to-price issuances that do not require broker-dealer intermediation.”

Regulations such as Basel III accords and the Fundamental Review of the Trading Book have led to banks reducing their balance sheets and cutting market-making activities. In addition, MiFID II, which comes into force in the European Union in January, introduces pre-trade and post-trade transparency requirements in fixed income for the first time.

As a result both corporate and government bond trading, as well as swaps trading, is increasingly shifting to electronic venues. As more liquidity is being provided by the buyside, they are looking for increasingly sophisticated tools which can help find the other side of large illiquid trades.

“GreySpark believes that these non-dealer balance sheet-centric forums will increasingly encourage buyside firms to bring in-house a variety of functions beyond price formation that were previously only offered by broker-dealer or pure broker-run execution franchises, such as transaction cost analysis,” said the report.

The consultancy continued that MiFID II will result in the provision of data feeds, whether raw, aggregated or normalised, increasing in the next 12 to 24 months.

“In Greyspark’s estimation the provision of raw data feeds, and potentially also aggregated and normalised data, will become a hygiene factor for bonds trading venue operators in the medium term,” said the consultancy. “Given the paucity of bonds trading data available to buyside firms, the significantly greater prevalence of such services on venues operated by broker venue providers indicates a greater level of buyside influence on those venues’ offerings than those operated by pure brokers or exchanges.”

Last month MarketAxess reported in its second quarter results that volumes on Open Trading, the firm’s all-to-all market for corporate bond trading, reached a record as a share of total trade volume and that regulatory changes, including MiFID II, are  likely to be a catalyst for future growth in electronic trading. Open Trading average daily volume was $907m, up 42% from the second quarter of last year. In May rival Tradeweb Markets, the fixed income, derivatives and ETF marketplace, announced the launch of all-to-all trading on its US institutional credit platform.

Nearly half, 48% of buyside bond traders are also bullish on all-to-all trading according to a report from Greenwich Associates in May. The study also found that more than half said they look to new trading mechanisms in order to trade illiquid bonds. However, Greenwich also said that corporate bond dealers will continue to be at the center of risk transfer, even through they have reduced their capital commitment.

“While no single technology or trading model innovation can make up for the principal liquidity lost, a combination of several will get the market as close as can be reasonably hoped for,” Greenwich added.

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