Research firm Aite Group has issued a report that concludes electronic institutional trading models are set to increase their participation in the US corporate bond trading markets. The firm predicts that electronic trading will account for 40% of the market this year compared to 30% in 2012.
According to Aite, 2012 was a record year for the US corporate bond market, as firms undertook historically high levels of bond issuance, taking advantage of the low interest rate environment.
However, although new issuances were at a high, activity in the secondary market did not follow suit. 2012 sell-side inventory was down 38% from the previous year and 78% from the 2007 highs. Aite attributes that to regulatory pressure and increased internal capital costs.
According to FINRA’s Trade Reporting and Compliance Engine (‘TRACE’), the proportion of business executed via electronic trading was unchanged from 2011 to 2012.
Institutional electronic trading had increased in tandem with volumes reported by TRACE, but the main growth driver had been electronic retail markets where lower deal sizes predominate.
The two biggest institutional platforms – MarketAxess and Bloomberg – are being joined by a range of models, including participant-to-participant platforms such as those provided by Knight and BondDesk, as well as dealer-to-customer and customer-to-customer platforms, for example, those offered by both Morgan Stanley and Goldman Sachs.
Aite reasons that whatever happens next in the bond markets, the electronic platforms are poised to win out. If the bull market in fixed income persists, then the dealer-to-customer and voice-driven principal trading model will be unsustainable for portfolio rebalancing or normal turnover.
On the other hand, if fixed income markets become bearish, or if money is pulled out of bonds in order to be invested into other asset classes, then there will be a reduced volume of new issuance. The buy-side had previously been finding its liquidity in such new issuances and the aforementioned dealer-to-customer and voice-driven principal trading model will fail.