Banks that for decades were tasked with brokering corporate bond trades – and paid Boiler Room-type spreads for the privilege – are now being pushed aside. As Bloomberg reports, upstart bond marketplaces like MarketAxess, Tradeweb and Liquidnet are all indicating that many bond trades occurring on their platforms are now happening between investors directly, without traditional bank-side brokering. This, needless to say, would have a deleterious effect on bank top lines as brokering institutional order flow for the $9.2 trillion market has historically been one of the main key source of revenue.
Over the last 10 years, corporate-bond traders have been one of the last groups of traders to adopt electronic transactions, even as the rest of the market evolved around them, largely due to the non-standardized nature of corporate bonds (and certainly leveraged loans). But now new rules have forced many dealers to act like machines, seeking bids and offers for bonds and linking the two, instead of just buying securities and holding onto them.
As Bloomberg reports, 27% of the corporate bond trades at MarketAxess were made on its all-to-all platform, Open Trading, in the fourth quarter; this was up from 3% in 2014. On Liquidnet’s platform, more than 90% of volume is between investors. And while electronic trading still remains relatively small, its market share is growing and will likely accelerate as it presents a much more cost-beneficial option to the buyside, especially in a time when trading volumes have collapsed in a world of buy-and-hold-while-praying-the-Fed-will-stay-loose.
One of the reasons behind the tectonic shift is that regulations after the 2008 crisis made it more expensive for dealers to hold bonds, which has resulted in inventories dwindling by more than 55% over the last 5 years. Rising corporate debt also has investors fearful of a looming credit crunch and speed matters. As the market starts to weaken, money managers look to offload bonds any way they can – through dealers or electronically – in the fastest possible way, and often that involves computers.
Richard McVey, chief executive officer of MarketAxess said: “We’ve opened the architecture so anyone can trade with
anyone else. The cost savings when they find a natural match are meaningful.”
All-to-all trading is also gaining favor because, just like stock trading, it grants traders the option of anonymously seeking a counterparty instead of having to wait on a dealer, especially one who may have a conflict of interest in transacting with you (as the Jesse Litvak scandal revealed). Investors polled by Greenwich Associates said that “all-to-all protocols would be the biggest factor helping trading over the next two years.”
In all, electronic bond trading made up 26% of the market in the third quarter. Those transactions were generally $4 million and under – a sum that, in the bond market, isn’t usually enough to be worth a bank’s time. Most trades over $50 million are generally still done using bankers. Still, the world’s 12 largest dealers collected $2.2 billion from company bond and loan trading last year, down from $2.8 billion in 2017 and $3.9 billion the year before, according to Bloomberg.
Discussing electronic trading, Rich Repetto, an equity analyst at Sandler O’Neill said that “it is the model of tomorrow for fixed-income trading. All-to-all represents significant advancement in automation in the market.”
But the bankers aren’t dead just yet. Sometimes, in an illiquid market with tons of complex instruments and trades often exceeding tens of millions in value, it’s nice to have a person on the other end of the phone line.
Kevin McPartland, head of market-structure research at Greenwich Associates said: “People want to talk to people, and know they are doing the right thing on transactions that are $50 million or $100 million.”
via ZeroHedge News https://ift.tt/2VcI4nk Tyler Durden