MarketAxess expects buy-side firms to increasingly provide liquidity on its electronic all-to-all fixed income trading platform as the firm introduced a new protocol for market participants to anonymously negotiate block trades.
Gareth Coltman, head of European product management at MarketAxess, said today at a media briefing that the share of liquidity provided by the buy side will continue to grow. He added: “In Europe, 55% of Open Trading volume is buy side-to-buy side and approximately 50% on a global basis. There has been a significant behavioural change but we are in the early days of buy side providing liquidity.”
Open Trading for European credit products went live on MarketAxess in February last year after launching three years ago in the US. In order to buy and sell bonds asset managers have traditionally asked for a request-for-quote from a select group of dealers, who have provided liquidity and set prices. However as regulations have forced banks to cut their balance sheets, fund managers have said it is harder to find liquidity in fixed income and have been looking for new ways to trade.
An all-to-all market allows multiple parties in a network to come together to trade. Open Trading allows anonymous trading across the network which could be between buy-side firms, between sell side and buy side with either party taking or providing liquidity, or even between banks. “Dealers have benefitted from being able to anonymously seek liquidity as they transform their businesses to an agency model,” said Coltman.
Gareth Coltman, MarketAxess
Open Trading average daily global volume across all protocols is now more than $600m (€535m), up over 100% from a year ago, according to MarketAxess.
Capital markets consultancy GreySpark Partners predicted in a report this month that the government bond market will become all-to-all and include non-banks as market makers as trading venues are seeking to diversify the range of liquidity pools and clients that they service.
“These efforts by exchange platform operators represent an effort to protect their market share from new, emerging venues or from direct disruption from market participants seeking to trade more directly with one another,” added Greyspark.
Russell Dinnage, GreySpark lead consultant, said in the report: “Some attempts by a range of market participants – including banks, inter-dealer brokers, buy-side firms and exchange platforms – to subvert these challenges by creating new trading models designed to increase the velocity at which bonds can be traded off a bank’s balance sheet are showing early signs of success. However, the corporate credit market in particular is attempting to continue to eek profitability from a market structure that is increasingly not fit-for-purpose, and a range of new types of instruments may emerge in the future that are designed to reinvigorate the securitization industry, which would change the face of the fixed income market forever.”
For an all-to-all market to succeed, large asset managers and institutional investors need to increase the sophistication of their liquidity aggregation tools so they can accurately compare the depth of liquidity in the cash market to pricing in the futures market according to Greyspark.
In Europe MarketAxess provides Axess All, an intra-day trade tape as the region does not have the Trace fixed income reporting facility that is available in the US and the firm can calculate an aggregate market price for bonds using pre-trade information, RFQ data and post-trade data from its Trax subsidiary.
Today MarketAxess introduced Private Axes, a trading protocol that allows bond market participants to anonymously negotiate large block trades while minimizing information leakage for investment grade and high yield corporate bond, emerging market debt, agency and Eurobond trading.
The platform’s Public Axe protocol allows a client to post interest in a bond at a certain level to the all-to-all network. In contrast the Private Axe protocol allows a client to post an axe which will not be shown publicly but they will receive an alert if MarketAxess finds a possible match that day. If a match is found the two parties can bilaterally negotiate a deal based on price and then size.
Richard Schiffman, Open Trading product manager at MarketAxess, said in a statement: “For dealers and investors with a specific trade in mind, Private Axes allows for greater discretion and control when looking to trade bonds in larger size.”
More on fixed income liquidity:
- Fixed Income Liquidity to Become More Centralized
- Whither Fixed Income Platforms ?
- Negative Yields Vex Fund Managers
Featured image by Romolo Tavani/Adobe Stock
