US corporate bond e-trading platforms set for consolidation

Research has suggested that despite a surge in trading volumes, mergers and acquisitions among platform providers is likely over the next 18 months.

Electronic trading platforms for corporate bonds face consolidation in the US despite a surge in trading volumes executed in 2018, new research suggests.

A report from Greenwich Associates has said that electronic trading levels increased to 26% of the total US corporate bond trading volumes in the third quarter last year, up from just 19% in the first quarter.  

Despite the growth, to a large extent trading in the US has normalised with bond trading platform provider MarketAxess and a few other large providers holding the majority of electronic trading volumes, the research said.

Kevin McPartland, head of research and market structure and technology at Greenwich Associates, and author of the report, explained that “the boom in new corporate bond trading platforms is over”.

The report stated that although it seems there is room in the market for competitors, new entrants face challenges across investment grade, high yield, block trades, micro-lots, dealers, asset managers and principal trading firms. Furthermore, the complexity introduced by the need to integrate with numerous liquidity and data sources remains an issue for the majority of market participants.

McPartland added that “all of this points to more mergers and acquisitions among the platforms over the next 18 months”.

Greenwich Associates also found that non-bulge bracket dealers are gaining corporate bond market share. Institutional investors currently send 56% of their bond trades to the top five dealers, spreading out their trading volume by sending more flow to middle-market and regional dealers which have picked up market share from bulge-bracket dealers that have refocused businesses based on return on interest. As a result, non-bulge bracket dealers now account for 25% of client trading, up from just 14% in 2013.

“Institutional corporate bond investors have voted with their feet, utilising those tools that work best within the current market structure,” McPartland concluded.