Bond ‘Electronification’: Catalyst Needed

Terry Flanagan

Institutional bond markets have come a long way in their evolution towards ‘electronification’, but market participants say a catalyst is needed to reach the next level.

“An external factor is needed to drive that,” Ben Macdonald, global head of product at Bloomberg LP, said Wednesday at the Sandler O’Neill Global Exchange and Brokerage Conference in New York.

Up until about a decade ago, fixed-income securities traded almost exclusively via private telephone negotiations. Regulatory changes and technological advances prompted the rise of electronic trading, which now makes up about half of U.S. government-bond trading, and which some money managers use almost exclusively for the most liquid and standardized issues.

But in the credit markets, spanning corporate, agency and municipal issues, screen-based trading accounts for only about 20 percent of trades, according to industry estimates. That figure is trending higher, but incrementally rather than robustly. Structural issues are the primary hurdle behind the modest penetration, as many corporate bond issues are small and trade infrequently, if at all.

Credit markets are sometimes liquidity-starved, but market participants and operators note than the mechanism underlying the trade can only go so far towards connecting buyers and sellers — it cannot create supply or demand.

Lee Olesky, Tradeweb

Lee Olesky, Tradeweb

“There are some things electronic trading can do for liquidity, and some things it cannot,” aid Lee Olesky, chief executive of Tradeweb.

Tradeweb focuses on making its electronic fixed-income and derivatives marketplaces more efficient by using technology to reduce cost and risk for its clients, Olesky said.

BlackRock, the largest institutional investor, reassessed how it found bond-trade counterparties about five years ago, when liquidity dried up in the wake of the global financial crisis.

“We took a step back and looked at electronic trading as key,” said Supurna VedBrat, co-head of electronic trading and market structure for BlackRock’s trading and liquidity strategy group. “You have to be able to access liquidity in multiple ways…(Electronic trading)  allows access beyond our traditional counterparties.”

VedBrat said electronic credit trading has increased meaningfully over the past three years, and adoption rates may accelerate as more institutional investors attain a comfort level. “Once the mindset moves more toward electronic trading, the movement is much faster,” she said. “There is more openness on the part of the buy side.”

BlackRock is “very supportive of innovation” aimed at boosting liquidity in bond markets, VedBrat said. Still, for the investment giant to route orders to a new trading venue, it must have both buy-side and sell-side liquidity.

Tradeweb’s Olesky said electronic trading can gain traction via technological innovation, regulatory fiat, and market conditions. The currently slow market environment is helpful for electronic trading in that more market participants are looking to cut trading costs, he added.

Featured image via Dollar Photo Club

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