Credit Trading at Crossroads

Terry Flanagan

The corporate credit market has lagged its fixed income brethren in adoption of electronic trading, but the differential is slowly narrowing as buy-side institutions expand their balance sheets and look for more effective ways of sourcing liquidity.

“We’re at a real crossroads,” said Kevin Arnold, head of Foreign Exchange, Rates & Credit-Americas at UBS. “Up to now, the credit business has almost been run like an exception. Whatever we’re doing in swaps, U.S. treasuries or European government bonds or other liquidity government bonds, there’s always been a belief that it wasn’t necessarily suitable for credit bonds.”

This belief has been based on the notion that credit wasn’t well-suited to electronic trading because of the nature of corporate bond liquidity, which is spread across multiple Cusips from the same issuer. But as dealers continue to retrench on their inventories, the buy side has displayed greater willingness to access liquidity on centralized bond trading platforms.

“As we’ve seen increasingly over the last year or so, there is an increasing gap between what dealers are prepared to do in terms of liquidity provision, and what clients need to do in terms of assets under management and their own need to access liquidity,” Arnold said. “There is an increasing awareness on the buy side that something needs to change.”

Kevin Arnold, UBS

Kevin Arnold, UBS

The perception that electronic trading of corporate credit was not a viable trading model in periods of market volatility hasn’t been borne out by experience.

“During the last several market blowups, we’ve seen significant spikes in activity on the very days when volatility has gone up, when we would have expected it to diminish,” Arnold said. “It’s actually been the contrary result rather to what we expected. Clients are aware that dealer balance sheets have gone down, and every unit of risk capital is now more expensive than it was, no matter what regulation or what regime you’re under.”

Arnold manages the sales trading business at UBS Americas, as well as its global execution and clearing business. Its trading platforms cover a broad range of asset classes, including foreign exchange, interest rate swaps, government bonds, and credit.

“UBS has a variety of electronic product offerings, and the best-known ones are our cash equity products and our foreign exchange tools,” he said. “There are variety of ways you can connect to us.”

With fixed income, UBS has developed e-trading models for interest rate swaps and connectivity to SEFs via its Neo platform. In credit, its flagship platform UBS Bond Port (formerly called PIN-FI), currently has about 900 clients trading on it, said Arnold. “We traded over $20 billion of securities last year, about 210,000 trades, and we are averaging 1,000 trades a day,” he said. “Volume this year is up 30% over last year. We’re getting gradual increase in user acceptance of trading bonds electronically as well as trading FX and equities.”

Just this week, UBS and New York Stock Exchange announced a deal whereby UBS customers can connect to NYSE Bonds through the UBS Bond Port to access a centralized pool of corporate bond liquidity. Under the arrangement, UBS Bond Port prices will be available on the NYSE Bonds platform, and UBS Bond Port will also distribute NYSE Bonds’ live and executable prices to its U.S. and European customers, giving them access to the U.S. credit market. The New York Stock Exchange is owned by IntercontinentalExchange.

“Given NYSE’s size, it fits very well with what we’re trying to do in terms of products and facilitating people linking to our prices,” said Arnold. “We achieve the ability to link our clients with NYSE product offerings and to also allow their clients to interact with our offerings.”

“The addition of UBS Bond Port to the NYSE Bonds platform offers bond market participants access to a unique pool of liquidity in the U.S. corporate bond market, where live, executable prices are displayed electronically in a transparent environment,” said Steve Crutchfield, NYSE group vice president and head of NYSE Bonds, Options and ETPs, in a statement.

Featured image by alphaspirit/Dollar Photo Club

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