MarketAxess Promotes Open Trading
MarketAxess is expanding its suite of electronic trading options beyond its traditional client-to-dealer niche.
The company’s Open Trading environment for corporate bonds offers a range of protocols, or trading workflows, in addition to MarketAxess’ request-for-quote model, such as Market Lists, an order book providing all-to-all execution based on disclosed and anonymous trading across trade sizes (odd, round and block).
“The big question for 2014 is will this market move away from the way we have traditionally operated in credit and others have done in rates, to an Open Architecture that creates a new liquidity model,” said Rick McVey, chairman and CEO at MarketAxess. “At MarketAxess, we are transitioning from a pure institutional C2D market to an all-to-all market. Last year, 75% of client U.S. high-grade orders went to Market Lists, where the other side could be a dealer, or could be a buy side client, ETF market maker or a hedge fund.”
The capital constraints imposed on banks by Basel III has caused many of them to exit the market making business, which means the traditional client-to-dealer RFQ model is giving way to open trading.
“There’s been a massive decline in overall turnover. Investors can’t move bonds through the Street the way they used to, which is driving demand for technology solutions like MarketAxess,” McVey said. “We are in a period of low yield and low volatility, which has had an impact on the trading environment.”
Noted Alex Sedgwick, director of research at MarketAxess: “Primary dealer inventories are still significantly below 2008 levels and with dealer inventories down, it’s difficult for them to provide active markets. We expect to see robust trading in 2014, but not necessarily a selloff.”
In 2013, $26 billion in client order volume went through Market Lists, and 31,500 all-to-all trades were completed on Open Trading.
“We are seeing signs that the market structure is starting to shift, and investors and dealers are starting to operate in new ways,” said McVey. “Investors are embracing a new form of trading to replace lost liquidity from dealer counterparties. It’s an interesting inflection point for the industry.”
“In the old days,” he continued, “portfolio managers would send orders through an OMS to the trading desk, which would then send orders to dealers. That world is changing now.”
Within the C2D market, MarketAxess has been heavily concentrated in $5 million and under trade sizes, where its market share is about 29%. In the future, it expects to be more involved in larger trade sizes as dealers exit the market making business.
“We have become an aggregator of dealer liquidity,” McVey said. “As we start 2014, demand for electronic solutions is focused on large trade sizes. Dealers can no longer warehouse bonds as they don’t have the balance sheets to take down large blocks. Capital charges are so onerous that they are moving away from block trading.”
In 2013, BlackRock’s Aladdin Trading Network and MarketAxess launched a partnership to reduce liquidity fragmentation and improve pricing across credit markets, while expanding both firms’ open trading efforts.
“When we started Market Lists a year ago, we allowed investors to create Watch Lists, so that if a match occurs it triggers an alert to the desktop,” said McVey. “We have gone way beyond that with Aladdin. Now our Market List orders are drilling straight into Aladdin order blotters. As we continue to help identify matches, we’re optimistic that traders will be able to transact with each other, and we are starting to see signs that the buy side is changing its behavior. In 2014 and 2015, we will see Open Trading be a much bigger part of the landscape.”
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.
IRS trading volumes have fragmented without an equivalence agreement.
Increased electronification has created useable and accessible real-time and historic trade data.
Members are evaluating payment-versus-payment for currencies not yet eligible for CLSSettlement.