An overwhelming proportion of buy- and sell-side firms want new electronic platforms to trade US corporate bonds to help manage the increased regulatory burden placed upon broker-dealers combined with the expected tapering of quantitative easing, a report from consultancy TABB Group has found.
Although platforms exist including those run by MarketAxess and Bloomberg, a clear majority of 77% of survey respondents agreed a new alternative trading platform for corporate bonds – ideally owned by dealers – could succeed in gaining market share from existing platforms.
The report is based upon interviews with 13 buy-side firms and 12 of the largest bond dealers, and compiled by Will Rhode, principal and director of fixed income research for TABB and the firm’s founder and CEO Larry Tabb. Speaking to theTRADEnews.com, Rhode said appetite for new platforms was growing from all sectors of the industry.
“Both buy- and sell-side participants have significant interest in new platforms for trading corporate bonds because they realise there are key structure issues that must be overcome in the wake of new regulation affecting how dealers in particular can interact in this market,” he said.
Basel III, the Liquidity Coverage Ratio and expected requirements under the Volcker rule have made it harder for banks to hold fixed income products on their books, further draining liquidity from already illiquid instruments. As such, dealers have had to adjust how they trade, with flow-on effects for the buy-side – who will be required to become price makers, not just price takers, to shore up liquidity in the bonds market.
But, Rhode asserted the idea fixed income products should migrate to electronic trading as equities has in the last decade is simply not an appropriate blueprint for the industry.
Whether new platforms would adopt request-for-quote models or central limit order books would be dependent on which instruments were being traded, the size of lots and which participants were involved – issues which different segments of the market may differ on.
Some instruments, however, have already shown they are suited to electronic trading – with 71% of high-grade US corporate bonds under US$1 million dollars executed via trading platforms rather than by phone.
“The buy-side recognises their dealers aren’t able to provide liquidity they once did so they want to explore the alternatives in detail now instead of waiting for the likely repeat of activity that occurred in the wake of the Fed’s quantitative easing indications last June,” Rhode said.