Revolution over evolution: The corporate bonds landscape
David Parker, Head of MTS Markets International
Over the last two years, electronic trading of corporate bonds has rapidly matured. Volumes traded and processed electronically have grown sharply, with almost every major market player now using electronic trading as a fundamental part of their business. However, because there are a lot of different options available – involving both different trading models and pricing – the amount of complexity and fee mod-els have also increased. The result is that firms that want to be active in electronic trading risk being charged multiple times to access identical liquidity across several venues.
That is where we see the opportunity for a revolution in the space. The mul-ti-venue, volume-based fee format is a product of the past and only serves to cre-ate duplication of costs for traders. We see the opportunity for a more supportive structure with a consistent, forecastable fee. This model ensures that trading par-ticipants don’t have to hunt for liquidity across different venues via multiple sepa-rate channels, each of which represents an expenditure of time and money.
The challenges of a fragmented landscape
The fragmented landscape, heightened by the sheer number of electronic trading venues, has traders searching for the liquidity they need – sometimes across six or seven platforms. This naturally increases cost and pressures for all those involved. To overcome this, and to better support the trading community, there needs to be more centralized liquidity and easier access to different pools in a single place. It is also worth noting that it’s not just about liquidity, but also about prices: what is the real market-wide price for a given security, and how deep is it? That’s important to know pre-trade, but the current market landscape makes it hard to do. It’s an age-old problem, and one that technology has the power to address, but in the credit markets has had limited success so far.
An all-to-all model addresses these challenges and helps meet the needs of traders. Not having artificial constraints on who can trade with whom is a great way of bringing different providers into one central place. The all-to-all model allows the market to become more consolidated and improves access of traders to traders. It shortens the search process and provides greater access to liquidity. It also helps spread market information around prices more broadly, which helps to get people more comfortable with taking risk in the asset class. And importantly, within the all-to-all model more nuanced information streams and styles of trading can reside, all relying on and interfacing with the broader market as appropriate.
Key features to look out for in a trading platform
Even with the benefits of an all-to-all model, there are still numerous options to choose from. However, all bond market participants should be aware of two key features when deciding on their platform of choice.
The first is obvious – cost. In particular, participants need to be aware of hidden costs. A lot of features labelled ‘free’ to the buy side are expensive to dealers – with the cost being charged directly back to the buy side as part of the price they see. Of course, venues provide a valuable service and should be compensated, but the amount should be reasonable and transparent.
Secondly, although certain platforms may be effective at meeting niche trading needs, having to sort out prices from across many different venues adds costs and complexity. So, it’s important to consider both a platform’s current and realistic future scale. A vital factor there is its degree of openness to liquidity providers/participants. If a venue has impediments to new users, a high cost for participation, or a closed model you are going to be seeing only a subset of liquidity via that channel. And importantly, you are likely to then have to find additional channels to reach the liquidity that doesn’t qualify for that particular venue but is still valuable.
Finding value with MTS
As the electronic venue landscape continues to evolve, firms have become more sophisticated. At MTS, we have introduced new functionality including a new user interface with a host of features – such as allowing more nuanced bilateral trading relationships to be established and developed within the all-to-all concept – to provide speed, accessibility, flexibility and confidentiality.
However, no matter how important technology is, price is something that will always be a key influencer. This is also a concept we’re hyper-conscious about, and something our clients have highlighted as a big concern. That is why we offer fee structures designed either to encourage liquidity or to set a low fixed price above which trading becomes free.
Most importantly, our all-to-all platform helps lower the bar for new entrants and alternative liquidity providers, allowing market makers to compete in different ways and providing the kind of shared price information that makes end investors comfortable moving more risk into the corporate bond market. While the corporate bond landscape continues to change, our work at MTS aims to provide the best service for traders on both sides of the market in the most cost-effective way possible.
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