Corporate Bond Electronification: Echoes of The Boom

Everyone loves to root for the underdog who takes on a much larger opponent and triumphs as a result of hard work and cunning. One of the major underdog trends over the past five years has been the electronification of the US corporate bond market, bringing faster, more efficient trading and opening up the way for new tools such as automation and data-driven trading models.

At the head of this trend has been a new crop of corporate bond trading platforms that many believed would reshape the markets. That hasn’t quite transpired, as evidenced by Greenwich Associates declaring this January that “The boom in new corporate bond trading platforms is over.” Some of the independent platforms remain with investor support, but consolidation, market inertia, and burn rates have consumed the majority of the start-up field.

Yet while the surge is definitely over, it may be a touch early to completely call the ball game. Innovation is not dead. It is just changing form. If the boom is over, the echoes alone are still strongly changing market structure today. The large incumbents have awakened and the marketplace is adopting change in a big way – though not generally at the benefit of the underdogs. Here are three notable developments that we see as an operator in the all-to-all corporate bond market with daily visibility into market trends:

1. It has never been a better time for all-to-all.

All-to-all trading – trading in a central marketplace with a level playing field among all participants – has been the beckoning siren call of many electronic providers, but difficult to achieve. Asset managers are not set up to be on-demand liquidity providers, no matter what proportion of the market they hold. But the explosion of fixed income ETFs and proliferation of quantitative/algorithmic strategies has lowered the bar for all-to-all trading and democratized the odd lot market like never before. As a result, a huge proportion of the odd lot market in the US today is trading on all-to-all venues like MTS and the all-to-all screens of the incumbent RFQ platforms.

2. True change.

Electronic trading in corporate bonds was, for many years, arguably just a “replacement for the phone,” connecting two people efficiently but with minimal value added. With the recent growth in all-to-all trading and the advent of net spotting products, automated execution, and automated responses to RFQ on the dealer side, we are seeing true change in the market with substantial value added. Which leads directly to the third development ...

3. Second-order businesses.

Growth in electronic trading has created its own secondary ecosystem of products that can only exist because electronic trading has reached critical mass. Vastly improved pre-trade data products are one obvious example. Other developments include the massive growth in fixed income ETF liquidity, the appearance of both dealer and independent algorithmic market makers, and custom portfolio trading, which is probably one of the most disruptive value- added products to hit the corporate bond space since the RFQ.