Buy Side Supplies Bond Liquidity
Asset managers provided half of the liquidity on MarketAxess’ all-to-all trading platform in the second half of last year, highlighting the change in market structure as banks have withdrawn from the market.
New regulations and increased capital requirements have forced banks to cut their balance sheets and reduce market making in fixed income, making it more difficult for investors to trade large blocks. As a result MarketAxess, the electronic bond trading venue, launched Open Trading which also allows buy-side firms to trade with one another in alliance with BlackRock. This alliance was expanded from the US into European credit markets in January 2015.
Gareth Coltman, European head of product management at MarketAxess, told Markets Media: “There are more than 270 buy-side firms and 40 banks using Open Trading in Europe. In the second half of 2016, liquidity provided on Open Trading was spilt 50/50 between banks and the buy side.”
He continued that Open Trading is growing very fast and the firm is connecting new pools of liquidity. “For example, last year we launched Private Axes which lets buy-side clients and banks advertise liquidity anonymously,” Coltman said.
MarketAxess reported last month that total global volume in Open Trading was $167bn through December 16, 83% more than in all of 2015. Open Trading volume was 13% of the total record trading volume of $1.3 trillion executed in credit products. MarketAxess estimated that liquidity takers saved over $100m in transaction costs through Open Trading last year as buy-side firms trading with one another transact at narrower spreads.
Coltman added that in the last 12 to 18 months there has been a growth in continental European clients on MarketAxess and there are now more than 400 active in the region.
In a recent report consultancy Greenwich Associates said Bloomberg, MarketAxess and Tradeweb are the three biggest corporate bond trading venues for US and European credit investors. MarketAxess has 80% market share in the US while Bloomberg leads in Europe with 73% market share.
Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in the report: “When Greenwich Associates interview data is combined across the two regions, the gap between the top two shrinks dramatically. Last but not least, Tradeweb has grown from a near-standing start just a few years ago. All are vying for more lucrative block-sized trades over $2m that have until recent years eluded online platforms.”
From the beginning of 2018 the introduction of MiFID II regulations will further change the fixed income market in Europe through new pre-trade and post-trade transparency requirements.
Coltman said: “Our overall strategy is providing management of the full trade lifecycle from pre-trade and execution through to post-trade via Trax.”
Trax is the MarketAxess subsidiary which provides trade matching, regulatory reporting and market data.
For example, MiFID II also requires asset managers to provide more evidence to their clients that they have tried to achieve best execution, but there is no centralised fixed income data in Europe. In 2015 launched Axess All, an intra-day trade tape for European fixed income markets, providing aggregated volume and pricing for the most actively traded fixed income instruments.
“Axess All uses Trax data to form a Trace-like view of European trading,” said Coltman. “Clients can compare executions to volume weighted average prices on Trax that day, similar to an equity benchmark.”
Greenwich said Trax acts as Europe’s answer to Trace in the US which was only achieved through a regulatory mandate.
Coltman continued that MarketAxess also provides a composite price from a variety of data sources to provide a real-time comparison before trading. “This can help provide evidence of best execution as illiquid bonds, particularly corporate credit, may not have a number of competing quotes,” he added.
Greenwich said: “In a market where dealers are less willing to make prices in general and investors are increasingly able to place resting orders with price limits into the market, a source of conflict-free theoretical pricing can help encourage trading where none would have happened before.”
A note from law firm Clifford Chance said a benchmark pricing service for best execution would need to draw data from more than one source; include real trade data wherever possible; provide for checks to ensure that inappropriate information does not distort the output (e.g., excluding data for unusually large trades); and involve an element of back-testing. Clifford Chance said: “Based on the methodology and variety of component sources described above, it seems likely that the MarketAxess Composite Price should be considered to be an adequate benchmark for the purposes of assessing and monitoring best execution.”
Last November Trax launched Insight+ for clients to efficiently control their reporting responsibilities and which supports testing for MiFID II transaction reporting through an Approved Reporting Mechanism (ARM) and pre-trade transparency and trade reporting obligations through an Approved Publication Arrangement (APA).
Coltman said: “One of our biggest differentiators is being able to integrate market data into the trading platform and also report through a MiFID II APA so clients have the complete package.”
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Under MiFID II, continuation of trading after a credit event may not be possible.