March sell-off has driven a longer-term shift towards all-to-all trading


Buyers and sellers were successfully finding opportunities in all-to-all trading as traditional liquidity tightened. Does that herald a permanent shift in behaviour?

All-to-all trading came into its own in Q1 2020. The International Capital Market Association’s May 2020 report ‘The European investment grade corporate bond secondary market & the Covid-19 crisis’, found that “as it became more difficult to find the three or more quotes that are often required as part of a firm’s best execution policy, [firms] turned to all-to-all request for quote (RFQ) functionality to reach a broader base of potential liquidity providers.”

MarketAxess, who pioneered the use of all-to-all trading by launching Open Trading after the 2008 credit crisis, saw Q1 credit trading volume of US$660 billion, up 29% year-on-year (YoY), with Open Trading recording a volume of US$209 billion, up 55% YoY. And as bond markets settle into a (slightly) calmer summer, MarketAxess is still seeing clients do more trading through Open Trading than ever before.

Gareth Coltman, Global Head of Trading Automation at MarketAxess, speaks to The DESK and explains why, and how, all-to-all innovation is helping to drive increased use of electronic trading.

So, what happened in March?

It’s often assumed that in a time of crisis, traders and the markets will revert to their old habits, but this time around we saw something different. In March, as credit markets became dislocated, trading participants went searching for new sources of liquidity. Rather than slowing, trading activity in secondary markets increased.

Client-to-client liquidity became a significant factor in that activity, as did the diversity of the participants in the all-to-all network. Open Trading spiked to US$4.4 million average daily volume in March. That was a 49% month-on-month increase, and it represented over 900 unique responding firms, ranging from traditional liquidity providers and dealers to less traditional entities such as corporations.

Can you describe the pool of liquidity that is in Open Trading?

I think the strength of Open Trading is very much the diversity of the trading participants. The liquidity pool includes asset managers who can be opportunistic, either because of their mandates or the type of firm they are, such as a hedge fund. We also have exchange-traded fund (ETF) specialists, systematic firms with strategies that arbitrage across markets, and regional or local dealers who have a different appetite or approaches to risk in a particular bond compared to traditional liquidity providers.

A good example of the latter would be in emerging markets, where we see onshore local dealers providing liquidity where New York or London dealers might not, because there are different supply and demand dynamics in their own market. Clients were able to get liquidity through Open Trading where they couldn’t get it anywhere else in the crisis.

It’s important to remember, though, that traditional liquidity providers, i.e. banks, are still a hugely important part of Open Trading. Where it’s helped them through the crisis is in enabling them also to diversify and be more opportunistic – being not just liquidity providers, but liquidity takers too.

How did block trading perform?

Interestingly, block trading through MarketAxess increased during the period. That may sound counter-intuitive, because we assume that in a crisis bigger blocks revert to voice. But we’ve found that, as traders were working from home in the middle of the crisis and didn’t have the same liquidity access on a voice basis that they used to have, that changed. In working through the electronic platform, using protocols like our Request for Market for EM bonds, they quickly realised they could get those blocks done via MarketAxess.

Would you expect longer-term changes to trading behaviour as a result of this experience?

More asset managers, execution desks and portfolio managers have realised there is an opportunity to add alpha through the execution process. It’s a huge advantage when you think that US IG spreads were 7x during the crisis. If you can save some, or all, of that spread through an all-to-all market like Open Trading, that is a huge cost saving for your firm. And so adoption is becoming mainstream. Why wouldn’t every client have an interest in figuring out how they can add that to their workflow?

We estimate that in Q1, Open Trading generated system-wide total cost-savings of US$201 million for liquidity takers, and US$87 million for liquidity makers. Having seen those cost savings, firms will expand their daily use of it as dealer risk taking is lower on a day-to-day basis, not just at points of high volatility.

What more are you doing to support traders as they settle into the ‘new normal’?

We’re continuing to enhance the accessibility of liquidity on the platform, expand our data and research offerings, and to evolve the tools clients have for automation. One such example: we’re building an auto-response capability for clients. That will enable traders to determine where they want to bid and ask on a range of bonds and, when an opportunity becomes available, automate the trade. Making sure they never miss an opportunity to add alpha. It’s not new on the sell side, but we are bringing the benefits of this technology to the buy side.

Do you see a permanent shift in trading behaviour?

We’ve seen a gradual increase in the adoption of electronic and all-to-all trading over the last few years, but it hadn’t quite reached tipping point. Now it has. As new clients have been driven by circumstance to rely more and more on the platform, and have seen the positive effects, the behavioural inertia has been overcome. I think that now the behavioural barriers to entry have come down, they will stay down.

©The DESK 2020