All-to-All Bond Trading Ratchets Higher

Shanny Basar

Nearly half of buyside bond traders expect more all-to-all trading to be the largest source of new liquidity according to consultancy Greenwich Associates.

Greenwich said in a new report, Innovations Ease Corporate Bond Trading, that 48% of buy-side bond traders are bullish on all-to-all trading. 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 buy side. The report said the corporate bond market is ‘electronifying’ faster than electronic trading volumes are growing.

Kevin McPartland, Greenwich Associates

Kevin McPartland, Greenwich Associates

Kevin McPartland, head of research for the structure and technology practice at Greenwich Associates, said in the report: “In other words, total notional volume executed via the screen underestimates the impact of technology innovation on the ecosystem.”

He continued that corporate bond execution venues and offerings that were a mere idea a few years ago are finally consolidating and starting to bear fruit. Meanwhile, the quantity of data available has grown, along with the number and quality of tools to analyze and action the data.

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In order to manage connections to the increasing number of electronic trading venues, TransFICC, a London-based fintech firm, was launched last year. TransFICC uses open source technology to allow banks to easily connect to the many new venues expected to launch under MiFID II, the new regulations covering European financial markets, from 2018, and to centrally collect data in this new fragmented market. MiFID II will force transparency in fixed income and derivatives as trades will have reported in real-time and audit trails from multiple venues will be required to evidence best execution.

Banks will be able to connect to the TransFICC API and the fintech firm will be able to add new venues, and their associated data feeds, very quickly.

Steve Toland, founder of TransFICC, told Markets Media: “We are testing our API with six banks and two buyside firms and will be launching a full release in the summer. We have also signed agreements with about 40 venues.”

Yesterday TransFICC and Bondecosystem, which provides co-location services in data centres, said in a statement that they have formed  a partnership as more than 120 electronic venues are currently being established. Last month TransFICC announced a partnership with IPC, which provides networks for financial markets,

“The partnership with Bondecosystem allows us to provide a seamless service to banks for whom co-location is important,” added Toland. “We also have a recent partnership with IPC, who have a network of banks, who want access to a cloud-based infrastructure.”

Tim Carmody, global product management and engineering, financial markets network at IPC, said in a statement: “Secure and reliable connectivity is crucial to sourcing liquidity, linking market participants and enabling all-to-all trading for fixed income market participants.”

Last month Tradeweb Europe said it will be introducing all-to-all trading on its credit platform in the region in second half of this year. The electronic fixed income, derivatives and exchange-traded fund venue had already announced the launch of all-to-all trading on the US credit platform.

Rival MarketAxess reported last month that volume on Open Trading, its all-to-all market for corporate bonds, rose to a record $59bn in the first quarter, with average daily volume up 56% with the first quarter of last year.  Open Trading lets investment managers, broker-dealers at investment banks and other market participants trade directly with one another electronically on an anonymous basis.

In the Greenwich survey 67%, of investors believe that executing corporate bond orders smaller than $1m in notional size or less is now easy, up from 56% the year before. In contrast it has become harder to transact larger blocks. Just 17% of investors believe that executing corporate bond orders larger than $5m is easy, down from 26% the year before. Greenwich Associates interviewed 52 buyside traders globally between June and August 2016.

“Helping to match those buyers and sellers is the holy grail of corporate bond technology firms,” said McPartland. “By cracking the code for matching large, and often illiquid, bond trades so that information leakage and time spent searching for liquidity is minimized, these firms aim to control the corporate bond market and rake in profits.”

More than half, 56%, of buyside bond traders said they look to new trading mechanisms in order to trade illiquid bonds.

However, Greenwich also said that the 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,” added McPartland.

Greenwich noted that corporate bond buyside execution management system are almost non-existent while electronic trading in other markets, such as government bonds, foreign exchange or equities, is driven by direct connections between the EMS and the relevant liquidity pools. As a result, proprietary user interfaces are still the primary window for investors into electronic bond market liquidity but there is no technology which provides a view of aggregated liquidity across venues.

“Larger players in this space see little benefit to their liquidity being aggregated, as doing so would put them in more direct competition with other liquidity on a single screen,” said McPartland. “While all are confident that their liquidity is deep and spreads are tight, encouraging quick access to quotes elsewhere isn’t in their best interest.”

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