This may be a poorly timed post since the Tabb Forum’s annual fixed-income conference is tomorrow, I’m pretty bearish on meaningful changes in corporate-bond market these days.
There’s been a lot of activity in the electronic-trading space for fixed income over the past year as agency brokerage ITG and Tradeweb launch their respective trading platforms for corporate bonds to compete against MarketAxess’s all-to-all trading model.
Even this week, we saw Lime Brokerage co-founder and former-CEO Alistair Brown announce the February launch of the first phase of OpenBondX, a new electronic fixed-income trading venue.
All of this activity and innovation is reminiscent of all the ECNs that sprung up after the US Securities and Exchange Commission (SEC) changed the order-handling rules in the 1990s and swap-execution -facility(SEF) explosion when the SEC and US Commodity Future Trading Commission (CFTC) began writing the new rules for over-the-counter (OTC) swaps trading mandated by Dodd-Frank.
BlackRock only added gasoline to this fire when it published its white paper calling for a reform of the corporate-bond market’s market structure in September 2014 asking for new and innovative trading models for the market.
However, maybe the buy side should start looking for change internally and not externally.
“The fault is not in our stars …, but in ourselves.”
No matter how many new electronic-trading channels innovators bring to market, it still up to the institutional investors to decide whether to provide liquidity to them or not.
It’s doubtful that all of the bells and whistles that the new electronic-trading platforms offer won’t do much but further fracture the approximately 16 to 18 percent of the daily notional turnover that already trades electronically. Moving the remaining 82 to 84 percent from voice-based request for quotes (RFQs) will be nigh impossible.
Institutional investors may say it wants an all-to-all corporate-bond trading model, but it’s doubtful that they will use it even if it eliminates dealer commissions. Buy-side traders need to feel comfortable being price-makers to use an all-to-all trading model and they are not.
Some broker-dealers, trading venues and vendors are trying to solve this like ITG’s synthetic pricing engine, MarketAxess’ Composite Price snapshot, and Interactive Data’s continuous fixed income pricing service.
All of these sound like viable solutions, but who of the voice-based traders will be willing to stake their firm’s performance, reputation and fiduciary responsibility on these new methods when calling to three or five dealers for quotes, which has worked for decades?
Until the buy side screws its courage to the sticking place (Shakespeare hat trick!) and become price makers, none of the current macro-market trends likely will change and the corporate-bond market will continue whistling past the graveyard.