Despite a surge in the share of U.S. corporate bond trading volume executed electronically in 2018, Greenwich Associates says consolidation is on the way for electronic platforms.
E-trading levels jumped to 26% of total U.S. corporate bond trading volume in Q3 2018 from just 19% in Q1 2018. Even amid that growth, the landscape of in the U.S. has normalized to a large extent, with market leader MarketAxess and a handful of other large platforms capturing the bulk of e-trading volume.
The boom in new corporate bond trading platforms is over, says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates and author of Corporate Bond Trading in 2019: Competition is Good, Complexity is Not.
On the surface, it seems there is plenty of room in this big market for a diverse set of competitors facing challenges across investment grade, high yield, block trades, micro-lots, dealers, asset managers, principal trading firms, etc. But history shows that while market participants like choice and competition, they dislike the complexity that comes with integrating countless liquidity and data sources. All of this points to more mergers and acquisitions among the platforms over the next 18 months, says Kevin McPartland.
Investors Turn to Regional Dealers and Other New Sources of Liquidity
When it comes to choosing dealers for trade execution, institutional investors still send 56% of their bond trades through the top five dealers.. Rather than consolidating their trading volume, however, they are spreading it out by sending more business to middle-market and regional dealers who have stepped in to pick up the slack as bulge-bracket dealers refocused their businesses on sectors and clients that provide the best ROI. Non-bulge-bracket dealers now account for one-quarter of client trading, up from 14% in 2013.
Investors are also taking advantage of new liquidity sources. For example, the profit opportunity presented by fixed-income ETF arbitrage strategies has brought a number of principal trading firms and some quantitative hedge funds into the corporate bond market.
Institutional corporate bond investors have voted with their feet, utilizing those tools that work best within the current market structure, says Kevin McPartland.
