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Credit Markets Find Religion in Efficiency

06 June 2017

By Chris Bruner, Head of US Credit at Tradeweb

A confluence of record issuance, increased trading volume, and tightening spreads has created a great deal of complexity for institutional investors in the corporate credit markets. In the US alone, investment grade corporate bond issuance set a new record in 2016, with over $1.5 trillion in new securities issued during the year. The trend shows no sign of slowing with issuance volume up 10.6% and trading volume up 5.8% so far this year. Meanwhile, corporate bonds are currently trading at the lowest level to Treasuries in over two years, ratcheting-up the stakes for market participants who must not only make smart trades to stay profitable, but also execute them incredibly efficiently.

With the liquidity pool moving so rapidly, the idea of a research team poring over spreadsheets and an asset manager calling a trading desk to execute a trade seems like a quaint relic of the days of Nick Carraway and The Great Gatsby. To survive and thrive in this environment, market participants need to leverage technology to deliver greater operational efficiency and transparency.

Better Market Intelligence
The process starts with price discovery and counterparty identification. With roughly $6 trillion in investment grade U.S. corporate debt outstanding, selecting the right bond – or bonds – to add to a portfolio has become a bit of a needle-in-the-haystack exercise. It requires an expansive purview of pre-trade data – including inventories, axes, runs and other price streams – to give traders the confidence to make informed decisions that factor in counterparty selection and price discovery.

Thankfully, electronic trading platforms have risen to the occasion by centralizing this information in the same portal through which investors access liquidity. By adding market data and analytics capabilities into the trading workflow, electronic platforms help to speed the trade identification process, ultimately helping to ensure best execution and minimizing interaction with third-parties that can add latency and operational risk to the equation.

Improved Liquidity
Unlike equities, which are traded frequently, 90% of all corporate bonds change hands fewer than five times per year, which can create challenges when aligning the motivations of buy-side and sell-side. Historically, this imbalance has been addressed by dealers holding bonds in their inventory until a buyer comes knocking, which adds a great deal of risk to their balance sheets.

Disclosed request-for-quote (RFQ) functionality has built electronic protocols into that process, going a long way toward improving liquidity by allowing several dealers to quote prices to interested parties in a highly automated fashion.

Taking that process one step further, the rise of all-to-all corporate bond trading has improved liquidity even more by allowing both buy-side and sell-side market participants to respond to price inquiries on electronic bond trading platforms. The introduction of this technology has broadened the network of prospective buyers and sellers, and increased overall trading activity. For example, Tradeweb recently launched its all-to-all (Blast A2A) corporate bond trading platform in May with nearly 50 new buy-side participants, alongside 50 global dealers and 130+ regional dealers connected to the platform. Trades marked for Blast A2A execution have generated more than $3 billion in trading volume since a beta launch in mid-March, and U.S. credit volume grew to more than $45 billion in the first quarter.

Consistent Operational Workflow
Trade processing and settlement also becomes a markedly more efficient process when integrated into an electronic workflow. This has become crucial in the era of transparency, where the entire trading workflow, from basic trade reporting to collateral requirements to speed of trade execution must be tracked, logged, and – in many cases – reported to regulators. By automating these functions as part of the trading process, electronic platforms have dramatically streamlined the post-trade side of the equation.

Collectively, these fairly recent innovations to the century-old process of corporate bond trading have been the lynchpin that have enabled the credit markets to maintain liquidity amid record supply growth and ever-more challenging market dynamics.

Chris Bruner will be joining the opening panel, New Initiatives for Meaningfully Improving the Quality of Credit Markets, at our upcoming North American Electronic Bond Trading Forum in New York on Wednesday 21st June. For more information about the Forum and to view the agenda, please visit the event webpage.

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