Electronic trading of corporate bonds still work in progress

Electronic trading of corporate bonds has grown in recent years as firms look for ways to access liquidity in the space. However, the growth is far from unanimous, especially on the buy side

Could electronic trading boost corporate bond market liquidity?

As liquidity in the corporate bond market continues to be an issue, electronic trading networks are gaining steam as industry members look for answers to their current problem.

Coming up with ways to find and access liquidity in fixed income is a well-worn topic. And while electronic trading in the corporate bond market has developed over the past few years, many still seem resistant to the concept.

A group of panellists discussed the possibility of solving the liquidity issue in the corporate bond market through automation and electronic trading networks in a session entitled "Automation: Rise of the Machines" at the 2015 TabbForum Fixed Income event at the TimesCenter in midtown Manhattan.

Just as industry members and Commodity Futures Trading Commission (CFTC) commissioner J. Christopher Giancarlo voiced highly divergent opinions regarding the impact regulations have had on other vestiges of the fixed-income market, there was disagreement between some panel members regarding what is possible in terms of electronic trading venues for corporate bonds.

Mass, workflow and data

For Constantinos Antoniades, head of fixed income at Liquidnet, the question that needs to be asked when looking at the issue is whether there is a better market structure than what is currently in place that will offer investors more liquidity at better prices more often.

"How does the electronic component look to make this market structure better?" Antoniades said. "What could trading venues effectively do to become part of the infrastructure and add value to clients that it is not doing today?"

Antoniades said there are three tests every trading platform needs to pass to prove it is adding something to the market. The first is critical mass, meaning it must build and establish a network of hundreds of institutional investors.

Improving the workflow is the second test for a trading platform. A computer should be able to make the life of a trader easier, Antoniades said.

Finally, being able to gather data is important to a trading platform. By compiling data effectively, a network should be able to show it in an actionable and consumable way to traders to let them make better investment decisions.

"It's less about request for quote, central limit order book, dark pools or block trades than it is about whether as a trading venue you can pass those three tests ─ critical mass, workflow improvement and data ─ to actually deliver a value that doesn't exist today to investors," Antoniades explained. "Otherwise, there is no point for electronic trading to exist."

Embrace the change

Michael Nappi, a senior trader on Eaton Vance's investment grade desk, said he believes that is how the market will end up — in some form. The acceptance of electronic trading, he said, has been a gradual evolution, but one he's seen develop over the years.

About four years ago, Nappi said he remembered putting in small trades electronically and hearing back from people on the voice model complaining about not getting a shot at a match. Two years later, Nappi said those same people told him to put those types of trades through the system due to being too small or too many.

"You're starting to see the sell side – guys in salesperson seats that I'd never think would embrace it – start to embrace it because our volumes have really shot up. We're able to trade more, so we're able to take different accounts and that leads to more trades. Now, we can take different products on and it allows us to really grow our volumes. I think everyone kind of recognises that," Nappi said. "We would never go back to an all-voice model. We do our fair share of voice-trading, but we could never go back and run the accounts that we need to run on a daily basis."

Herd mentality

Dwayne Middleton, head of US fixed-income trading at Morgan Stanley Investment Management, and Amy Koch, head of fixed-income trading at Standish Mellon Asset Management Company, both felt the mindset on the buy side makes client-to-client dealings more difficult.

Middleton pointed out the difficulty in making a strong two-sided market when many buy-side firms have internal rules in place about buying and selling the same security on a given day across portfolios. Although he does see the industry slowly moving in that direction, there is still some space to grow.

Koch reiterated Middleton's point, stressing that the buy side also tends to have a herd mentality because a lot of firms are managing the same mandates.

"A lot of clients are coming in and being very specific about what we're allowed to own and what we can't, and how quickly we have to sell if there is a downgrade," Koch said. "When push comes to shove and there is something we have to sell, we all have to sell it. We're not going to be that liquidity provider for each other because before we can buy it for another account, you really have to worry about the timing or a deadline or a compliance violation."

This article was originally published on sister website WatersTechnology.com.