Has the growth of electronic fixed-income trading platforms reduced the buy side's need for close relationships with their dealers when sourcing liquidity? Like many relationship descriptions, the answer is: It's complicated.
"I still think that relationships are still very important," said Gregg Moore, head of trading, Americas fixed income at Schroders, during a liquidity-fragmentation panel at the WBR Fixed Income Leaders Summit in Boston. "At the same time, we have to prepare for periods when it goes away. We've seen very small episodes of that in the last few years."
It truly depends on which bonds someone is trying to trade, added fellow panelist Steven Divittorio, managing director, head of US high yield trading at Barings Asset Management.
The market is bifurcated, according to Divittorio. "There is a liquid part of the HY market that will trade a little tighter, and then there is a particular part of the market, such as in CCCs and Bs, where you have to talk to someone about those," he added.
Jim Switzer @AB_insights, Gregg Moore @Schroders, Chris Dopp @DeutscheBoerse, Rick Shiffman @MarketAxess, Steve DiVittorio @Barings and Capital Advisors Group’s Anthony Cucinotta discuss navigating liquidity fragmentation with moderator, Chris White @viablemkts. #FILS pic.twitter.com/RBVj3RCmYU
— ViableMkts (@viablemkts) June 7, 2018
For firms like the Capital Advisors Group, whoever supplies liquidity is not as important as the liquidity itself.
"We are looking for best execution," said Anthony Cucinotta, head of trading at Capital Advisors Group. "We don't care if we are getting from a platform or a dealer. But I would say that the service level has increased on the dealer's side."
Where technology has removed some of the buy side's dependency on the dealer community, it remains a two-edged sword noted James Switzer, global head of credit trading at Alliance Bernstein.
"For me, there is a lot of ways that you can look at fragmentation," he said. "But the fact is that we have to trade bonds in smaller pieces to be able to keep our transaction costs at bay," he explained. "We cannot trade large blocks in bilateral negotiations without pushing the trade further away."
Switzer also advised the room that the buy side should not wait for alternative capital to arrive and replace the buffer capital that firms have lost in recent years.
"I believe that alternative capital is not coming, so we have to find new ways to find liquidity," he added.