Bonds Need ‘Liquidity Intelligence’
Liquidity intelligence, helping to enable bilateral negotiations for illiquid bonds, is likely to be more important than the growth of electronic trading in fixed income, according to consultancy Greenwich Associates.
In a report, Corporate Bond Liquidity Solutions Emerging, Greenwich said 80% of investors feel that reduced bond market liquidity is affecting their ability to implement their strategy. As a result, platforms that open up the pool of potential buyers and sellers have made progress and all-to-all trading volumes have increased.
Other platforms, such as Algomi, provide liquidity intelligence by using data to help locate any bond. Greenwich said this is a more difficult and complicated undertaking but could arguably have more impactful over the long run.
“If Uber can upend the taxi business without owning any cars, it might be possible for a complete data set with the right intelligence to create a virtual balance sheet without having one of its own,” added the consultancy. “As such, putting the two solutions together should take us a long way toward a more fluid secondary market.”
The Greenwich report cited data provided by Algomi that suggests bond dealers are unable or unwilling to provide prices on more than 90% of client inquiries for illiquid bonds. Kevin McPartland, head of research for market structure and technology at Greenwich Associates, told Markets Media: “These illiquid bonds will still need bilateral negotiations and the market needs more tools to enable those conversations to take place.”
The report said Algomi’s platform is currently the only one that provides distinct yet interconnected offerings that benefit both the sell side and buy side.
“The secret sauce for liquidity intelligence is in allowing the buy side to gain access to data on what the sell side is doing,” said Greenwich. “To alleviate sell-side concerns, Algomi has created ‘safe zones’ to ensure only the right people see the right data.”
Last November Algomi announced a partnership with Euronext, the pan-European exchange, to deploy the bond information network’s technology for a new multilateral trading facility so dealers will also be able to search for liquidity with other dealers.
Paul Humphrey, head of fixed income, rates & FX at Euronext, said in a blog at the time: “Dealers will be able to access the trading interface directly through their existing Algomi technology, thus linking Euronext, banks and investors in a collaborative network. The current limited data on buyers and sellers, results in low liquidity and this platform will use algorithmic smart matching processes to search for liquidity and best execution.”
Greenwich said incumbent bond trading platforms have also recognized the opportunity to provide liquidity intelligence. For example, MarketAxess built SalesAlert, Bloomberg created Dash and Tradeweb purchased CodeStreet. “We fully expect these offerings to receive continued attention at their respective firms, with the reach and dataset of each expanding in light of the potential opportunity,” added the consultancy.
The report said MarketAxess continues to dominate corporate bond trading venues in the US while Bloomberg leads in Europe, with Tradeweb in third place behind these two platforms.
McPartland expects smaller sized trades to become commoditized and block crossing networks, similar to those in equities, to develop in the bond market. “It is like when we buy small things online but go to the store for really expensive items,” he said.
Liquidnet, the institutional block trading platform, launched a fixed income dark pool in September 2015 and last year had 65 members in Europe, Middle East and Africa who were providing $2bn of average daily fixed income liquidity in the region.
The Greenwich survey found that half of the U.S. participants plan to start adding a new execution platform with Liquidnet at the top of their list. The consultancy interviewed 998 US institutional investors and 1,132 European institutional investors active in fixed income between February and July 2016.
“Investors [are] drawn to Liquidnet’s ability to seek out natural matches via blotter-scraping, which enables the trader to see benefits without much additional effort,” added the consultancy. “While Electronifie is exploring its options, TruMid revamped its technology and parts of its model and is seeing early success with the updated approach.”
At the beginning of 2015 Greenwich Associates published research outlining 18 different corporate bond-trading initiatives in the U.S. and since then nearly 40% have either closed, been acquired or are in the process of restructuring.
McPartland said there is a big opportunity in the fixed income market. For example, more than 80% of the roughly $6 trillion traded annually in the U.S. market is still matched and executed over the phone or via instant messenger.
“There could be platforms to handle different issuers, types of trade or region, and several could be owned by the same firm,” he said. “The froth has gone and the providers who are left are providing something desirable to the market and can now move forward.”
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