Convergence In Fixed Income


If everyone had it their way, every tradable asset class would be available at click of a mouse. And for the most part, the electronification of markets makes sense. It allows a market to become more transparent and more importantly, accessible.

But some things never change and the institutional fixed-income crowd is not ready to give up their trading turrets and voice systems for large block trades. Requests for quotation are still the industry norm. Not everyone is ready to speed things up and turn bonds, CLOs and other debt instruments into the next high-frequency market.

Since the turn of the millennium, retail fixed-income trading in corporates has been by and large an electronic affair. There’s liquidity and multiple platforms; plenty to go around. The institutional crowd has stayed mostly offline, preferring to do business on the phone and resistant to change. But the two spaces are beginning to converge. New platforms are allowing investors to source liquidity from both the retail crowd and the institutional side of the business.

“There’s way more trading venues available via ECNs. When Fidelity or whoever went out with an order, they used the exchange. Now there are 50+ venues to choose from,” consultant Douglas Newsome told Markets Media. “People can now arbitrage different products across different venues. So when a new technology is introduced into the business and it catches on with customers, it forces people to adapt that technology.”

With the power shift from the institutional dealer to the retail investor, there’s now a need for brokers to keep competitive. As order sizes continue to decrease, comfort with price will also become more important than ever. Institutional traders will reconsider making large block trades and will take advantage of retail liquidity and access to multiple ECNs, breaking up orders into multiple 100 share lots.

It’s easy for one to forget just how large the fixed-income market is. With so many different issues, years-to-maturity and different types of instruments, it is vast and complex in its makeup. Finding a market price is not as simple as it would be in equities.

“The impression I have is that the hurdle for convergence is just the price action guys will have. They say they’ll sell at $95 and put it up,” said Newsome. “Institutional guys don’t put up a specific price. Brokers are the price makers. So when you get a guy from a big institution to go on to a retail platform, he doesn’t want to post a price. He wants to pick someone else’s price off. The dealers don’t have the power anymore; it’s the investor.”

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