04 Mar 2011, Rupert Warmington, Credit
The last two years have seen unprecedented growth in the electronic trading of credit. In the wider market, new issuance in 2010, whilst down from the record levels seen in 2009, was still healthy. There was a specific focus on the European high-yield segment, which saw record levels of issuance. In an era of historically very low fixed income returns, institutional investors have continued to look to the corporate bond markets – again, particularly the high-yield segment – to enhance portfolio yields.
This trend has been supported by a broader structural change in the marketplace. In particular, there has been a shift away from bank lending to financing via the capital markets following the onset of the financial crisis in 2008 and subsequent constraints on bank balance sheets. Alongside this, with upcoming changes to the regulatory landscape and MiFID II coming fast, credit trading in Europe is undergoing a permanent – and paradigm – shift.
Trend towards electronic trading
Within this environment, electronic trading platforms such as Tradeweb, that are able to deliver the tools and efficiencies needed by institutional clients, have seen very significant growth. Over the last two years, there has been a continued escalation in the volume of e-credit trading in Europe, with Tradeweb reporting three-and-a-half times the pure cash credit business in 2010 compared with a year earlier. Supranational, Sovereigns and Agencies (SSA) and covered bonds also saw a substantial increase in trading volumes during the year. This reflects a widespread and structural change in the trading patterns and workflows of “real-money” institutions.
The trend is also supported by the likely direction of regulations. Although the exact rules under which the market will operate are yet to be finalised, it is even now apparent that the broad sweep of legislation will push trading further towards electronic platforms.
“Regulation is one of a number of drivers for e-trading,” said Rupert Warmington, director of European credit markets for Tradeweb. “But the growth we are seeing is not only a reaction to an evolving legislative landscape. There is also an enthusiastic acceptance of the efficiencies and inherent liquidity on e-platforms.”
In Europe, a greater emphasis by dealers on servicing flow business in vanilla products (where there is greater liquidity on electronic marketplaces) has further boosted e-trading volumes, which are estimated to now represent 25%–30% of the overall market. This contrasts with the US corporate bond market, where a much lower proportion is executed over electronic platforms.
Liquidity deepens as e-trading gains strength
Liquidity on Tradeweb’s credit platform has recently seen a significant shift upwards, with 10 further dealers committing to offer pricing over Tradeweb since October last year. Just as important as the substantial jump in the number of dealers providing prices, is the consistently high quality of that liquidity. Metrics for electronic liquidity are all showing continued and dramatic improvements, reflecting the sell-side actively seeking flow business through electronic platforms.
Meanwhile, asset managers, who typically see themselves as searching for both efficient execution and price transparency, have responded with a marked increase in trading in European spread products – and particularly in “pure” credit. As a testament to how the platform continues to develop as an effective and efficient trading tool, a very high proportion of cash credit trades – some 90% – are executed inside Tradeweb’s composite prices.
The surge of activity seen on Tradeweb is reflective of the trends seen in the wider market. The latest Market Liquidity Income Survey from the Association for Financial Markets in Europe (AFME), for example, indicates that the move towards electronic trading of credit products continues to gain strength. The survey reported that, for the second year running, investment grade credit is one of the products that respondents expect to trade more electronically in 2011.
It also highlighted that spread products – SSA, investment grade credit and covered bonds – were ranked within the top six (out of 15) in terms of percentage of overall traded volumes that were executed electronically last year.
This heightening of interest in e-trading from both buy- and sell-sides reflects a substantial shift in transparency and liquidity in the credit e-markets. It is interesting to contrast this with the general environment for credit in 2008, when the credit crisis severely impacted liquidity in spread products on electronic platforms. As clients adapt and alter their trading patterns to the new world order, Tradeweb continues to upgrade the functionality of its credit platform and works aggressively to expand the number of asset classes that are covered.
Responding to client demand
To mirror client workflows, and to bring functional and competitive advantages to a wider audience, Tradeweb aligned its SSA and covered bond trading facilities with its unsecured “pure” credit marketplace at the beginning of 2010. This change was designed to increase efficiencies and transparency around the multi-asset class trading that clients look for in the real world. It also allows investors in these products to spot quickly and efficiently where inventory and liquidity is for selected securities and then trade accordingly.
Clients now have access to more information, more bond analytics and more price transparency through the platform’s “spread” screens, and through the entire trading cycle of price discovery, trade execution and post-trade processing.
“Being in a position to offer genuine depth of liquidity to clients across many asset classes is very important,” noted Tradeweb’s Warmington. “Tradeweb is constantly seeking dialogue with buy- and sell-side participants, to work with them and develop the functionality and effectiveness that they need.”
One example of the value that is derived from this ongoing dialogue is the success of list trading on Tradeweb, where customers can simultaneously execute multiple trades from a single list of orders across multiple asset classes, facilitating – for example – larger month-end trading flows, or other peak flows in activity. Because of the significant efficiencies and real time-saving impact, this has become an invaluable tool for Tradeweb’s institutional client base – most specifically, asset managers, with whom Tradeweb conducts 80% of its trading volumes. Around 35% of credit trades on Tradeweb are executed via lists.
What does the future hold?
Whilst the proportion of European credit products traded electronically has not yet reached the levels seen in European government bond markets (where approximately 45% of traded volumes are electronic) Tradeweb believes strongly that e-credit trading will continue to grow in significance. A “request for quote” model sits well with the stated intentions of the international regulatory bodies to mandate greater transparency and operational integrity in the global bond markets.
Regulation, reinforced by an increasing focus from buy-side firms on efficiency, has established a clear trend towards electronic trading. Tradeweb is at the heart of, and a driving force for, these changes.
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