Institutions Tap ECNs for Liquidity

Terry Flanagan

Retail fixed income trading networks represent a vast untapped pool of liquidity for institutional investors.

With dealer corporate bond inventories down by almost 80% since 2007, institutional investors are actively seeking new sources of liquidity. This combined with the recent proliferation of new electronic trading venues has created a very fragmented market.

“The irony is that on the retail side, fixed income has been electronic for 15 years, but on the institutional side it has been voice driven,” said Michael Chuang, CEO of iTB, whose iTBconnect platform connects institutional investors to electronic fixed income trading venues.

“Retail investors and financial advisers are doing business electronically, in contrast to institutional investors, which creates a substantial pool of liquidity that’s been under the radar,” said Chuang.

iTBconnect provides clients with the ability to access multiple fixed income venues through one customizable interface or API, resulting in increased liquidity, higher trading volumes, and improved workflow efficiency.

“Today, 50% of transactions in munis and corporate bonds are occurring on retail ECNs such as Bond Desk, Knight Bondpoint, TMC Bonds and NYSE Bonds,” said Chuang. “Given the recent retrenchment in dealer market making activity, and given the growth in the retail side, it made sense for institutional investors to seek liquidity not only at primary dealers but on the retail side, where there’s a plethora of activity on a number of Cusips.”

iTB uses FIX protocol in all of its communications with external platforms.

The FIX Protocol is the language used by firms across the world to facilitate electronic trading. It has achieved mass adoption for front-office equities trading, and its use is steadily expanding across the foreign exchange, derivatives and fixed-income markets.

“FIX is the backbone of electronic trading,” said Chuang. “For fixed income, the adoption of FIX came later than equities or FX, but it did come.”

The Fixed Income Connectivity Working Group (FICWG) has welcomed the positive response shown by the industry for the adoption of open, standardized protocols for the trading of fixed income cash bonds.

Launched by the global investment banking community in 2011, FICWG aims to promote the global use of the FIX Protocol and other industry standards across all fixed income products.

“The need for FIX has been triggered by the Dodd-Frank Act and the development of SEFs,” said Courtney Doyle, director of operations at FIX Protocol. “The buy side has gotten behind the effort.”

Since launch, FICWG has worked in collaboration with the FIX Protocol Ltd (FPL), to create best practices recommendations for trading fixed income instruments via the FIX Protocol.

Work on defining the first version of the best practices for trading bonds commenced in March 2012 and was formally published by the FIX Protocol standards body in February 2013.

Since then, many of the leading electronic bond venues have moved to adopt the open FIX Protocol and the associated best practices for the electronic trading of government as well as major credit instruments.

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