Bond Markets Seek Liquidity

Terry Flanagan

Fixed income liquidity is at a premium as smaller asset managers exit the stage, leaving the bulk of market making in the hands of a few very large financial institutions. “A factor which has further compounded the liquidity conundrum is the changing composition of the buy-side,” Jesse Fogarty, managing director at Cutwater Asset Management, told Markets Media. “Subsequent to the financial crisis, some of the large fixed income managers have become significantly larger, in some cases exponentially larger. This less fragmented buyer base has exacerbated the fragile liquidity picture post-crisis.”

Fogarty added, “The Verizon deal is an example of the influence that some of the large fixed income shops have, that was a massive deal at $49 billion with the bulk of the deal taken down by a handful of managers.”

Cutwater is a fixed income only asset manager that manages about $25 billion. “We have deep skill sets across all of the major asset classes in the credit markets and recently built out our CLO platform,” said Fogarty. “The way we organize our asset desk is to have a senior sector specialist assigned to all of the major assets classes of the fixed income market, many of the sector specialists will have lead portfolio management responsibilities for a sleeve of our business that generally correlates closest to their asset class.”

Liquidity is also being impacted by changes on the sell side, whereby banks have shed inventory and limited their market making roles as a result of the Volcker Rule. The upshot is that sourcing liquidity has become a process that lends itself to electronic trading platforms.

Bloomberg has unveiled its Electronic Trade Order Management Solution, or ETOMS, a managed service used by U.S. regional broker-dealers to access and engage fixed income electronic markets as both liquidity providers and liquidity takers.

As the fixed income marketplace becomes more electronic, regional dealers need to connect to multiple trading venues in order to source liquidity and respond to client orders. Bloomberg ETOMS enables dealers to access liquidity in U.S. corporate, municipal, and government bonds as well as automate certain aspects of trader workflow, such as price generation, trade negotiation and execution.

Southwest Securities, a Dallas-based regional dealer, uses Bloomberg ETOMS to manage electronic inquiries and orders, automate price quotes and connect to fixed income liquidity venues.

“We use Bloomberg TOMS and ETOMS to aggregate liquidity from across the fixed income universe and manage our electronic order flow, inventory and risk exposure more efficiently,” said Daniel Leland, executive vice president of Southwest Securities. “Bloomberg ETOMS connects us to diverse liquidity sources and automates trader workflow so we can focus on providing our clients with best execution.”

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