Block trades continue to be executed primarily via phone and chat despite the growth of electronic trading across the corporate bond market over the last ten years, however the market is ripe for change according to a new study by Coalition Greenwich.
Their findings suggest that only 10% of buy-side block trades – those with a notional value of $5 million or more for investment grade and $1 million or more for high yield – are currently executed electronically.
Block trading continues to be one of the last remaining analog aspects of the market due in large part to the importance the buy-side places on relationships and the manual processes.
As electronification continues, the interpersonal relationship side of this kind of trading is slated to remain – with access to new issuance, client insight and market colour perception some key motivators.
Coalition Greenwich confirmed that “the buy side values their dealer relationships highly,” finding that 68% of buy-side traders manually select dealers to include in their RFQ – based either on their own experience or on trading history.
Almost half (44%) of US traders responded that these relationships are very impactful, while slightly less – 23% – in Europe agreed.
However, “these relationships and the revenue they generate can and will be increasingly electronic, as trading venues offer more ways to ensure the buy-side can get their order executed at the best terms while still providing the dealer with the client connections they need,” said the research body.
When asked which methods provide the best outcome while trading block orders, the majority highlighted methods which are carried out away from venues. Three quarters of respondents highlighted chat/IM as the best choice for orders with a notional value over $2 million (for both investment grade and high yield). On the other hand, 58% of those surveyed confirmed they see more benefits in the phone.
In comparison, just 18% highlighted disclosed RFQ broken into multiple orders, while 15% believe sending a disclosed RFQ of the full-size results in the best execution.
However, the report explained: “Data has made and will continue to make the buy side trade more efficiently in the coming years. Trading decisions—whether to send a chat or send an RFQ— are increasingly based on liquidity scores rather than absolute trade size. In other words, not all $5 million orders are created equal, and execution will become more systematic over time to weed out old habits that are ineffective in the current market.”
Ultimately, the market appears to recognise the potential benefits of executing more block orders on screen, however ideally this must be rolled-out alongside tools and products which allow relationships to stay intact, said the report.
The ‘electronifying corporate bond block trading’ study by Coalition Greenwich was based on interviews with 53 buy-side corporate bond traders across the US, Europe and Asia.