Price streaming offers cost savings and operational efficiencies, but it could fragment liquidity
In a sign of just how technology is changing trading, some of the largest dealers are bringing the Netflix model to corporate bonds.
At least six major dealers – Bank of America, Barclays, Citi, Goldman Sachs, JP Morgan and Morgan Stanley – have started streaming live, executable prices directly to select clients.
These initiatives are still in their infancy and details are sparse. Dealers are wary of divulging how many clients they have signed up, or even the number of bonds for which streaming prices are available. Even so, one banker says the bond market may be on the cusp of a “seismic shift”.
Change is long overdue for what has traditionally been a staid and hidebound corner of the financial markets. While other asset classes, equities for example, are traded at the touch of a button – or algorithmically, without any human intervention – the majority of corporate bonds are still traded by phone.
Asset managers, under pressure to cut costs and improve efficiency, are receptive to new, electronic trading models. Streaming offers customised prices for each client and the ability to auto-execute a trade at any time.
In some ways, this mirrors the revolution that has swept through the home entertainment industry. Internet-streamed television and movie services, such as Netflix, Amazon Prime and YouTube, disrupted the incumbent terrestrial networks by putting consumers in control of the viewing schedule.
But with choice comes fragmentation and cost-creep. The growth in the number of streaming media services, each with their own subscription fees – not to mention the need for faster internet and smart devices – means committed viewers can easily end up paying more than for the old cable and satellite TV packages.
The shift to price streaming for corporate bonds could result in a similar dynamic. To handle the new feeds of bond prices, asset managers will need new tech – either developed in-house or bought off-the-shelf. The next generation of execution management systems will need to cope with an ever-expanding number of bilateral, dealer-to-client streams.
Streaming providers are likely to become more widespread. In addition to the major dealers, Tradeweb and MarketAxess offer streaming prices for corporate bonds. Non-bank liquidity providers may look to muscle in, as they have in other markets. Some forward-thinking asset managers already see the need for an aggregation service to bring efficiency to this new market.
“Think of it like a US interstate highway,” says one investor. “If there was a utility out there that would serve as the connections from the sell-side to the buy-side and back, so people could just jump on to those pipes, that would be better than dealers having to maintain hundreds of different connections.”
The danger is that price streaming, having started out as a clean, low-cost trading concept, ends up fragmenting liquidity and hiking costs. Television streaming has given consumers more programmes to watch, but finding them is harder and more expensive. Bond streaming must avoid the same fate.
But then, no-one wants to go back to the days of scheduled programming.