Few issues in global markets have drawn more anxious attention than the state of liquidity in corporate bonds. Market participants have one eye on the Fed’s countdown to an interest rate increase, and the other on a market in which the growth in trading volumes has significantly lagged the explosive increase in issuance and institutional bond holdings.
Market participants rightly worry about the impact of interest rate increases or some other event on credit market liquidity. Much of that concern centres on whether global banks, the market’s traditional suppliers of liquidity, will be in a position to meet the liquidity challenge in volatile periods, given higher bank capital requirements and other regulatory limitations.
These concerns are understandable but often take insufficient account of the pace of change in the structure of the corporate bond markets. The history of equity and other markets provides at least an indication of the impact of regulatory initiatives of the type we are seeing in recent years in the credit market. If the past is a guide, the corporate bond market is heading toward more complexity and fragmentation, changes that will require a new way of thinking about liquidity.
Helping to drive these changes is electronic trading’s growing share of volume. Electronic trading in corporate bonds has developed less rapidly than in some other asset classes, a reflection of the immense variety of instruments and historically bilateral nature of credit trading.
With the growth in electronic trading has come a new generation of trading venues seeking to attract liquidity. Offering a range of different trading protocols, these new entrants, as well as incumbents, are competing for flow and for screen space.
In this picture, global banks, with their large bases of institutional clients, will continue to play a significant role, but they will be joined by a number of ‘alternative’ liquidity sources. Investment managers are adapting as well, with some hedge funds and quant firms starting to make as well as take prices.
It’s far from clear which platforms or trading protocols will emerge as winners over the long haul. But the momentum towards a more complicated, diverse liquidity landscape looks unlikely to be reversed. Episodes of market volatility will probably do more to hasten the transformation than to slow it.
Helping clients navigate this complex landscape is the mission of UBS Bond Port. Bond Port recognizes that liquidity will be increasingly defined in terms of integration and connectivity.
As a leader in the corporate bond market, UBS developed Bond Port’s network of links with leading trading venues, brokers and other liquidity providers to broaden the execution opportunities for our clients. With access to these diverse liquidity sources, UBS draws on our expertise in electronic trading across the major global markets to help clients address three core challenges.
The first is determining the best price in a market where comparable trades are occurring across a range of different venues and channels. With the growing fragmentation of liquidity, quality execution takes on an extra dimension of difficulty. UBS Bond Port tackles this problem by aggregating prices and volume information across multiple trading platforms and other liquidity pools, providing a holistic view of opportunities.
The second challenge is deciding which protocols offer the most effective approach to executing a trade. The growing adoption of electronic trading means market participants have a broader range of options for execution. With Bond Port, UBS teams bring to bear their deep experience with electronic trading strategies and knowledge of trading venues to help users find the best path to a quality execution.
The third challenge is controlling costs. Maintaining direct access to multiple trading venues and channels can quickly translate into higher operational costs. Updating systems and processes to adapt to changes in the trading landscape will be an increasingly significant concern. With UBS Bond Port, clients can use their existing order management systems and pricing processes and systems, which simply interact with UBS Bond Port’s platform. This creates notable efficiencies for users who need to access a variety of liquidity pools.
On average, UBS Bond Port facilitates on average, 850 trades a day in multiple currencies, with over 800 unique clients active every month.1 Operating 24 hours a day, trades on Bond Port can flow over more than one time zone.
Solving the liquidity puzzle in corporate bonds will not happen overnight, but the most effective solutions will take into account where the market is heading as well as where it is now. UBS Bond Port’s strategy underscores our conviction that openness, choice and connectively give clients the best opportunity to achieve quality, cost-effective execution in this evolving market.
1.Calculated based on UBS data over January-August 2015
This article was written for The TRADE’s 2015 Fixed Income Handbook by Mark Russell, global head of bond execution services, UBS.