12.11.2018

Wall Street Bullish on Corporate Bond Liquidity

12.11.2018

Will liquidity every return to the corporate bond market? Wall Street is optimistic that it will return eventually, but what will drive it will is open for debate.

The two most popular contenders, according to the respondents of an online survey hosted during a Greenwich Associates webinar, were new venues and market structures (56%) and increased participation by non-dealer market markers (49%).

A third of the respondents also noted that new credit hedging products would enhance liquidity while 28% of them thought that dealer capital would return once increased volatility returned. Only 2% of them held the nihilistically belief that greater liquidity would never return to the market.

New technologies will play a role as well, but it will not create new liquidity by itself, according to Jim Perrello, a portfolio manager at Wolverine Trading who participated in the webinar.

However, new technologies can reduce frictions in the market and ease access to the existing liquidity, he said. “As demand and capability of the participants improves, we will see the liquidity they contribute improve,” he said.

Fellow panelist Michael Noto, managing director, market structure at Barclays, recommended that market participants do not pin their hopes dealers increasing the amount of capital they likely would deploy.

“If you go back to the days when the dealers might have had ten times the amount on their balance sheets assigned to their corporate bond inventory, technology did not play nearly as large a role,” he said. “They were not as efficient in turning that inventory, identifying buyers and sellers.”

“It might be that there is not be additional dealer capital, but it might be more efficiently deployed thanks to dealers improving the quality of their technology,” agreed moderator Ken Monahan, vice president structure and technology at Greenwich Associates.

One such improvement has been the greater adoption of algorithmic pricing, which enables traders to divvy up a parent order into child orders, according to Amar Kuchinad, chief strategy officer at Trumid.

“It is not possible when you are relying on humans to price every one of those trades,” he said.

Although the trend has increased the volume of electronic trades for less than $5 million, Trumid has witnessed an increased demand for larger block-transaction on its platform.

“We are still focused on humans getting larger-sized trades done, and that is happening with increasing frequency,” said Kuchinad. “We are trading three times the volume that we did a year ago.”

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