There is clearly an unmet need for direct connectivity between dealers and their clients in US & EU corporate bonds.
Big investment banks including Morgan Stanley, UBS and Goldman Sachs have begun to offer clients direct feeds of prices for US and European corporate bonds. Although these feeds are relatively new, and concentrated in the most highly liquid credit classes, they have the power to open up new execution models for the buy side.
“In the US, where we are more reliant upon runs and the Trade Reporting and Compliance Engine (TRACE) for trading, we have started to partner with a handful of banks as a progression from FIX indications of interest,” says Dan Veiner, global head of Fixed Income Trading at BlackRock. “We have bilateral, direct connections to several of the major banks in order to access their axes and inventories via Aladdin, our order management system (OMS).”
As an evolution of current execution protocols streaming is interesting to broker-dealers for several reasons. It allows them to automate trading, helping them to manage costs. It also maintains bilateral relationships with clients, so that liquidity provision can be correlated to their profitability. For asset managers, it evolves trading capabilities.
“The natural progression is ‘click-to-trade’, effectively taking in a stream of firm prices directly into the order management system,” says Veiner. “That’s in its early days. We are utilising it now to a limited extent and developing our counterparties and ecosystem to make it robust.”
As a model, direct streaming offers an alternative to trading on a venue, which has been growing in popularity over the past five years. In April 2019, market operator MarketAxess reported an average daily trading volume (ADV) of US$4 billion in US investment-grade credit, up 14% on its April 2018 figures, while the same month rival Tradeweb saw a total ADV of $2.9 billion on its US investment-grade credit platform, up from an ADV of US$1.6 billion a year before, an increase of 80%.
“If we believe that the market is going to grow in terms of the adoption of electronic trading, then there is going to be a much more diverse set of solutions than there is today,” says Chris White, CEO of market data system BondCliQ. “What is surprising, is that people have been predicting the adoption of platforms but never trading without a platform.”
Phil Allison, global head of automated trading in fixed income at Morgan Stanley, says, “In credit today, the leading edge is in bilateral connectivity and I think we are waiting to see exactly which of the various platforms may or may not emerge to fulfil that need.”
Diversity rules As trading venues have seen volumes grow, banks have seen their returns across the fixed income universe falling. In 2018, investment bank revenues for corporate bond markets fell to US$10.4 billion, according to sector analyst firm, Coalition. That represents a 21.4% decline against their 2017 figures, and a 50.1% drop against 2013 revenues, 2013 being the year in which Morgan Stanley’s Bond Pool, Goldman Sachs’ GSessions – which White developed – and Citi’s Credit Cross trading platforms all shut down.
“The return dynamics are not there for dealers to inflate balance sheet as outstanding issuance expands,” says George Athanasopoulos, global head of UBS’s FX, rates and credit (FRC) business. “So, dealer inventories have collapsed and the business is less about stacking shelves and waiting for somebody to come in and buy, and more about finding product to match demand. As we move more towards price facilitation rather than principal market making, liquidity aggregation on venues becomes very important.”
He observes that the increase in pricing venues has led to an abundance of information and service, but has not led to a corresponding abundance of liquidity, which in combination is putting additional pressure on sell-side margins.
Banks have adapted to trading electronically on the request-for-quote (RFQ) platforms, which effectively mirror the voice-trading workflow of calling a broker and asking for a price on a trade, by automating their price-quoting for liquid instruments on those platforms, using algorithms to set the prices.
By combining automated sell-side pricing, trading venue connectivity, and buy-side automation, a highly efficient workflow for low-touch trading can be developed by asset managers.
Veiner says, “In BlackRock a large percentage of the number of trades we do are via one-touch or no-touch auto-execution via RFQ platforms, and those are heavily reliant on the counterparty to provide automatic liquidity provision on the back-end, which is effectively a non-transparent stream.”
The problem with credit Automated trading has been far more rapidly adopted in the US government bond markets, because there is a single issue resulting in a smaller set of tradeable instruments.