MarketAxess: New trading protocols are expanding, not cannibalising, liquidity

Dan Barnes

MarketAxess has reported its second highest level of quarterly revenue and credit trading volume, as well as a record total trading volume in Q1 2022 in its latest quarterly earnings report.
The bond market operator said that emerging markets average daily volume, compared with Q1 2021 was up 5% and that international trading volume represented 32% of its total credit volume. In addition, it noted an increase in the number of active clients, up 5% to 1913.

It also reported that US Treasury Live Markets all-to-all order book ADV was up 37%, municipal bond ADV, was up 205% and emerging markets (EM) local markets trading volume had increased by 22% over the same period.

In a briefing with investment analysts on the results, Patrick O’Shaughnessy, of Raymond James asked the extent to which newer trading protocols like portfolio trading, Live Markets and Mid-X represented incremental volume for MarketAxess versus cannibalising existing request for quote (RFQ) volume.

“I think there’s a growing menu of suite and suite of solutions available to clients here than there has been in the past,” said Rick McVey, CEO. “A year ago, we only had one dedicated market maker in corporate bond Live Markets. We’re at five now, we expect two or three more during this quarter. You’re seeing dealers get excited by order books being really an important source of not only making markets for them, but also finding their own liquidity. If we can build that base in the most liquid end of the corporate bond market, it will have positive implications for the rest of the less liquid corporate bond market … It’s tough to say with portfolio trading. I think that some of it, it is potentially an alternative way for clients to transfer risk. And part of it is probably new opportunities that have been made available.”

Christopher Gerosa, chief financial officer, added, “We’ve heard particularly from hedge fund clients [that] the opportunity to place orders on a live order book and not just request price or respond to RFQs in a more automated way, using things like our automation tools. Those are exciting clients to trade credit like they’ve never traded before. They’re seeing trade opportunities that didn’t exist before.” So I really think there’s a higher velocity embedded in these new trading protocols that we’re delivering, whether it’s automation or Live Markets, it is giving a certain subset of the client population trading strategies that they just haven’t deployed in the credit market before. So higher opportunity, lower costs of trading that introduces trades that they otherwise wouldn’t make in the past.

Fielding a question from Michael Cyprys of Morgan Stanley regarding the potential size of trading automation and the demographic suing those services, Gersoa said, “It’s really in high demand from our largest institutional client. So I think very large money managers around the planet that have lots of trade tickets and they’d like to do that fully electronically, fully automated either in what we call low touch fashion or a no touch fashion, no touch just means they deliver it through an API to a set of pre-instructed commands for the automation to execute.”

Noting that existing automation is primarily an auto-RFQ solution creating greater efficiency in RFQ responses, he said that using auto-responder/trading at mid-point or using automation that via Live Markets were in the plans to be developed over time.

“That’s really exciting for what we can do with automation because of the savings it delivers,” he said. “Not only is it a savings for clients to kind of reduce their cost of trading and simplify their trade desk, but it’s also a savings and execution quality. In some of our large clients that rely on automation tools. We see close to 50% of their activity coming through automation, so those are sizable reductions in workflow for those clients. And those are the clients that are most focused on automating their trading and their trading tickets in the bond market. And so we do see an opportunity amongst some of the dealers that are not auto quoting that could rely on some of our auto quoting solutions, but right now the primary client of automation here at MarketAxess is some of the largest money managers on the planet.”

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