We all know that the massive reduction in dealer inventories and the cost of capital has had a huge negative impact on liquidity in the corporate bond market. While the primary market has helped soften the blow, that crutch isn’t going to be here for long as rates start to rise over the next few months and years. Hence the renewed marketplace talk of corporate bond electronic trading.
Our global fixed income study, based on 4000 interviews with global PMs and traders, did find that more market participants are trading fixed income products electronically, however the total volume put through those platforms has in fact declined. While that top line finding is interesting, its the product level details that tell the story in a more accurate way. Electronic trading in US Treasuries in on the rise amongst institutional investors for example. This makes sense from macro economic perspective, but also because on-the-run US Treasuries are standard and highly liquid.
The corporate bond story shows notably regional differences. While our research found that e-trading volume is down in the US, its up in Europe (you’ll have to read the report for our explanation as to why). While e-trading calculations using TRACE volumes (which includes smaller size trades not captured by our institutional interview base) show a slightly more rosey picture in the US (more on this in a later post), but they still show that while the market is in source of better corporate bond liquidity, the market structure has not changed in such a way that a burst of e-trading growth can be expected.
The press release is below and Bloomberg News did a great write-up on the research as well. The report is available for Greenwich Market Structure and Technology clients, but comments and thoughts are welcome from all.
Tepid Growth in 2013 Pushes E-Trading to 25% of Global Fixed-Income Volume
February 19, 2014
MarketAxess, Bloomberg and Tradeweb Dominate Globally New Entrant Market Share Remains Limited
Electronic trading systems increased their share of global fixed-income trading volume only slightly in 2013, bringing the proportion of total volume executed electronically to 25%.
A new report from Greenwich Associates, Global Trends and Competitive Analysis of Multi-Dealer Platforms, reveals that 45% of institutional investors execute at least some portion of their fixed-income trading volume through electronic channels. According to the report, which is based on Greenwich Associates research among 4,000 institutional investors globally, last year’s moderate increases represent a continuation of the slow, long-term growth of electronic trading.
That growth was not uniform across products and regions, however. “Institutional e-trading of investment-grade corporate bonds showed limited growth in 2013, with some regions posting declines,” says Greenwich Associates consultant James Borger. “This stagnation is expected to continue in 2014.”
The electronic trading of government bonds experienced growth in 2013 with the U.S. leading the charge. Globally, 55% of government bond investors now trade 35% of total notional volume through electronic systems and strong growth is expected throughout 2014 as interest rates continue to rise.
Top Platforms Dominate
The report identifies electronic trading leaders and laggards, showing total penetration and volume weighted market share in each region across investment grade corporate bonds, high yield corporate bonds and government bonds. Despite the arrival of new entrants into the marketplace, top e-trading platform players continue to dominate.
MarketAxess continues to lead corporate bond e-trading in the U.S. with Tradeweb leading in U.S. treasury trading. Bloomberg has the largest market share across the board in Europe and Asia.
Greenwich Associates expects fixed-income e-trading growth to continue at a slow pace in coming months, with U.S. corporate bond markets showing limited growth, European credit markets growing steadily and U.S. treasury markets growing more quickly. “While the imminent rise in rates globally is expected to drive investment dollars away from bonds, this secular shift could increase volatility and volume, ultimately boosting e-trading usage across the board,” says Kevin McPartland, head of Greenwich Associates Market Structure & Technology.
As balance sheet constraints drive banks to shrink commercial corporate lending in favor of corporate bond issuance agency and shrink principal holding of corporate bonds and associated secured funding to provide secondary market liquidity, are the solutions being created fast enough (eTrading, bank agency execution, shadow banks / buy side firms taking up liquidity provision slack) or is this a secular degradation of corporates ability to raise debt?
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