The banks that have stood in the middle of the corporate bond market for decades are increasingly getting pushed aside. Electronic marketplaces like MarketAxess Holdings Inc, Tradeweb Markets LLC and Liquidnet Holdings Inc say that more of the company bond trades that happen on their platforms are between investors directly, without banks necessarily being involved.
Known as all-to-all trading, this shift may weigh on revenues for banks that have long profited from being either buyers or sellers in just about every trade in the $9.2tn market.
For more than a decade, corporate-bond traders resisted efforts to carry out more transactions electronically even as most other corners of financial markets embraced the move to computerised buying and selling. But that’s slowly been changing as new rules have forced dealers to act more like machines, linking up buyers and sellers in almost real time as an exchange would, instead of buying securities from investors and hanging onto them.
For MarketAxess, 27% of corporate bond trades were on its all-to-all platform Open Trading in the fourth quarter, up from 3% at the start of 2014, the company said. On Liquidnet’s all-to-all platform, more than 90% of volume is between investors. Electronic trading is still a relatively small part of a market dominated by dealers, but its share of trading is growing.The switch to all-to-all trading may accelerate from here. The post-crisis regulations that have made it more expensive for dealers to hold onto corporate bonds have resulted in dealer inventories of the securities shrinking more than 55% over the last five years.
Surging levels of company debt have made many investors fearful that a corporate credit apocalypse is coming, and whenever the market starts to weaken, more money managers may look to offload securities however they can. It also saves investors’ money by eliminating the middle man: MarketAxess says clients cut $53.7mn in transaction costs in the fourth quarter by using Open Trading.
It is the model of tomorrow for fixed-income trading,” said Rich Repetto, an equity analyst at Sandler O’Neill & Partners LP. All-to-all is gaining favour with investors because it gives them a new option of anonymously seeking any counterparty to their trade, not just a handful of dealers who know who you are and set their prices accordingly, he said.
All-to-all represents significant advancement in automation in the market.” Investors polled by Greenwich Associates agreed, overwhelmingly saying all-to-all protocols would be the biggest factor helping trading over the next two years. Just as money managers have spent decades cutting their trading costs in equities, they’re looking to lower expenses in bond trading.
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