All-to-All Trading Emerges in Fixed Income

Terry Flanagan

Since 2008, there has been an increase in electronic trading of fixed income securities, along with a decrease in inventory held by larger dealers and banks.

“If we look at some of the subtle changes in market structure that have come about, we see non-traditional liquidity providers, or price makers, coming up within the marketplace,” Bill Vulpis, managing director at KCG BondPoint, told Markets Media. “By non-traditional, I mean companies other than banks and large sell-side firms, including smaller broker dealers who are reliant upon electronic platforms to make markets.”

According to a January 2015 study by Greenwich Associates, 80% of institutional investors report difficulties executing corporate bond trades of more than $15 million, reflecting decline in market liquidity caused by the pullback of fixed-income dealers in the wake of new and more stringent capital reserve requirements.

With dealer inventories shrinking, investors’ search for new liquidity providers is proving a boon to the fast-developing ranks of electronic trading platforms, according to Greenwich. All-to-all trading accounted for an estimated 6% of electronically executed U.S. trades in 2014.

Bill Vulpis, KCG BondPoint

Bill Vulpis, KCG BondPoint

Vulpis noted the capital constraints that are weighing on the profitability of large banks’ fixed-income businesses. “The margins that were once in the secondary trading of fixed income businesses are not there any longer, and there’s a host of reasons for that, one of which is technology,” he said. “While you still have a fragmented marketplace within fixed income, it’s certainly less fragmented than what it was years ago when I first started out.”

From a market structure perspective, the RFQ model, both voice and electronic, has been the mainstay of fixed income trading. “Voice will continue to be a component of the marketplace,” Vulpis said. “The RFQ model has certainly served the marketplace well. Whether it’s RFQ over the phone, or whether it’s automated RFQ, like some of our competitors run, RFQ remains the predominant way fixed income gets transacted today when you’re looking at larger size.”

In a widely disseminated Sept. 2014 whitepaper, BlackRock said greater use of all-to-all venues, including exchanges, clearinghouses and other platforms, would enhance liquidity by enabling greater market connectivity and centralization.

“Increased acceptance of all-to-all trading venues, where multiple parties from the buy side and sell side could come together and communicate, would provide opportunities to uncover latent liquidity,” said the paper.

Alongside RFQ there has emerged platforms offering live, executable two-sided market quotes, such as BondPoint, an electronic marketplace that links more than 400 financial services firms to 200,000 live and executable bids and offers. “Since 2012, we’ve seen a growth of over 30% in the available liquidity, or the number of bids and offers, that have live quotes on the BondPoint platform,” Vulpis said.

BondPoint, as a registered ATS, is separate from any of the market-making units within KCG. “We are a regulated entity where market-makers put in their prices and takers aggress on those prices,” said Vulpis. “We’re a total agency platform. We do not make any markets on that platform at all. We just run the platform as a venue, and we provide the liquidity center, as well as various tools and applications for people to interact with that liquidity center, whether it be trader desktops broker workstations, or FIX connectivity.

As electronic trading brings greater efficiencies to the market, the number and size of trades that get executed electronically will continue to grow.

“I don’t think anybody can dispute that there has been growth and there will continue to be growth there,” said Vulpis. “This is characterized by continued integrations into the various buy-side OMS’s out there which are starting to do in the fixed income space things that have traditionally been done in the equity space. The linking of liquidity and investment in technology will drive continued adoption of electronic trading of fixed income.”

BondPoint earlier this year launched connectivity with Charles River Development’s Investment Management Solution. “The integration with Charles River brings greater efficiency because not only can you see price discovery, but you’re able to click and trade,” said Vulpis. “As the traders gets through price discovery, they see the issue they want to purchase, click a button and send the trade across.”

Featured image by everythingpossible/Dollar Photo Club

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