The convergence of electronic trading and fixed income is being driven by regulatory and market forces.
One of the biggest changes resulting from the Dodd-Frank Act, the Volcker Rule, and persistently low interest rates is that a lot of dealers no longer have liquidity in certain instruments such as corporate bonds, which places buy-side institutions in a quandary.
Traditionally, institutional asset managers looking to trade corporate bonds would go to their dealer and the dealer would then take on the risk out of their own inventory.
“Dealers are not taking the risk because interest rates are so low,” Barry Smith, managing director of global capital markets at data center provider Equinix, told Markets Media. “Before, they would hold it and they would take a piece of the spread. Now basically its sitting all with the end investor, and their only counterparties are other institutional investors.”
Barry Smith, Equinix
Smith will speak at Markets Media’s Global Markets New York Summit on Nov. 20.
The upshot is that electronic markets are being created to essentially replicate the models that have been established in other asset classes.
“Everything is moving in the direction of greater transparency in the market,” said Smith. “There's a lot more players that are stepping into the game.” He cited as examples Liquidnet’s acquisition of trading platform Vega-Chi and Tradeweb, whose business model was built on the dealer-to-dealer market.
Tradeweb Markets, a provider of fixed income and derivatives marketplaces, recently launched a U.S. corporate bond trading platform for institutional investors. The Tradeweb U.S. Corporate Bond Marketplace delivers enhanced price discovery, trade negotiation and automated processing with live, streaming prices for round-lot trades, the company said, as well as supporting flexible request-for-quote (RFQ) and list trading protocols for both round- and odd-lot trades.
"The corporate bond market has reached an inflection point where investor demand and market conditions are driving the need for greater price transparency and connectivity," said Billy Hult, president of Tradeweb Markets, said in a release. "Innovation in electronic trading is the key to enhancing liquidity across the sector, and our new offering represents the first step forward in providing clients with a total solution for credit trading."
Single dealer platforms have evolved into multi-dealer platforms, almost by default. “Companies like J.P. Morgan would end up giving multi-dealer quotes, but everything would always be executed through J.P. Morgan,” Smith said. “It got to the point where it was dealer-neutral. So what's happened is over the years even those single dealer platforms have provided multi-dealer access.”
J.P. Morgan has reportedly assembled a 150-person electronic-trading team designed to advise its own internal traders as well as its clients on electronic-trading decisions. The new group, called JPMorgan Execution Services, will advise clients and internal traders across asset classes, including fixed income.
The new unit will monitor trades on electronic platforms across asset classes and will combine that analysis with an understanding of the different trading venues and styles to help inform decisions on the best place to trade.
Equinix’s NY4 data center in New Jersey handles much of the data flowing through these platforms. ‘Everybody I've ever done a walk through with in NY4, that knows anything about fixed income says, ‘Yeah, I've been told that all the U.S. treasuries trade out of here,’” said Smith.
As it turns out, there exists no business continuity plan for such a vital market. The Federal Reserve, which handles the new issues for U.S. treasuries, can’t confirm that a plan exists, according to Smith.
“You would think that they would have some sort of BCP plan that everybody who's a dealer for government issued bonds would to adhere to,” he said. “But they don't even know.”
Featured image via Dollar Photo Club
