New Tech Still Fixed-Income Liquidity’s Savior

I have written several articles on the impact that technology is having, and its potential to impact the fixed-income market’s historic problems with liquidity, from the increasing number of technology platforms coming to market to the emergence of intelligence-focused utility models.

A recent paper, Corporate Bond Liquidity Solutions Emerging, from research firm Greenwich Associates, reports that investors have been frustrated with the problems surrounding executing large trades in illiquid issues, but that the efforts undertaken by execution venues and the liquidity-intelligence platforms are starting to ease those woes.

Of more pressing concern to industry participants looking to technology to solve liquidity issues is the finding that over 80 percent of the roughly $6 trillion of corporate bonds traded annually is stilled matched and executed over the phone.

More than 80 percent of the 400 credit investors interviewed by Greenwich in 2016 also said that reduced market liquidity is “impacting their ability to implement their investment strategy.” 

That second finding probably won’t surprise people familiar with how the fixed-income market works, but the shrinking size of trading desks at asset managers means that the importance of technology platforms can only increase.

While the options for technology adoption have grown, it’s clear that human interaction still lies at the heart of bond trading.

Last year, I wrote about the ever-expanding roster of new technology platforms that have swamped the market. There were around 30 platforms in operation at the end of 2015. That figure has now ballooned to as many as 120. While the options for technology adoption have continued to grow, it’s clear that human interaction still lies at the heart of bond trading.

The Greenwich report found that 51 percent of those surveyed in North America were planning to add an execution platform “they are not currently active on” over the coming year. The important distinction here is that these are not all planned replacements, but rather additions to existing execution platforms. Greenwich found that New York-based Liquidnet topped the list of planned platform additions, with 55 percent of respondents planning to connect to its fixed-income offering. 

TruMid was also ranked highly on the platform wish-list, a sign that its efforts to revamp its technology offering last year, including the launch of new “swarm on-demand” trading functionality, will continue to bear fruit in terms of further client wins.

The findings of Greenwich’s survey suggest to me three key points on the state of technology progress in the fixed-income space.

First, the dominant players in this arena—Bloomberg, MarketAxess and Tradeweb—should be looking over their shoulders. While market participants may be looking to add further platforms instead of replacing their existing ones, I don’t expect that model to last.

Sooner or later it will come down to which platform is providing the best liquidity and trading options. When buy-side firms in particular are pressed to reduce operating costs and streamline trading processes, why would traders need an abundance of platforms when one could do the job?

Prominence

Second, the role of liquidity intelligence providers is only set to grow in prominence. My feature in last February’s issue of Waters—Fixed-Income Liquidity: An Alternative FIX—found that collaboration between the buy side and sell side to make trading data easier to share and access was seen as a key element to easing access to liquidity.

That trend is showing no sign of slowing. The Greenwich report mentions information compiled by London-based bond trading technology vendor Algomi, which says that “just shy of 7,000 inquiries from the buy side to the sell side, with a combined notional value of roughly $54 billion, were made in February 2016 alone, suggesting an average industry size of roughly $8 million.”

Finally, it’s clear that I will have plenty of fodder for our pages on this topic for some time to come. The progress being made through technology is clear, and, although it might take longer than some would like, efforts to introduce new ideas and ways to share information that do not negatively impact bond trading activities ultimately help ease the liquidity issues that the buy side has struggled with for so long.