Buy-Side, Sell-Side Agendas Seen Converging as Research Shows $1mm-$25mm Round Lots Gaining Lion’s Share of E-Trading Growth
NEW YORK & LONDON--(BUSINESS WIRE)-- Sell-side providers in the US secondary corporate bond market have spent the past two years jostling for position to prove they have the right protocol, the right technology and the best liquidity pool to solve the perennial challenge – how to trade illiquid bonds more frequently and easily.
According to new TABB Group research, “Corporate Bond Trading 2016: Predicting the Platform Winners,” written by Radi Khasawneh, research analyst at TABB, not one of the platforms has emerged with a silver-bullet solution. Although different buy-side and sell-side agendas have stalled development, TABB believes there’s evidence they’re beginning to converge.
The buy side is worried about the liquidity imbalance caused by dealer balance-sheet withdrawal – they want to find ways to trade with each other. The best and most efficient way to do that would be in a Central Limit Order Book (CLOB) but as Khasawneh points out, the success stories seen so far have been retail-focused venues at the smaller end of the market.
Dealers, he explains, are eager to gain electronic trading efficiencies to rationalize their bottom-line balance sheet costs and facilitate new riskless principal methods of execution, but this comes with the caveat that buy-side workflow remains inefficient and locked in the traditional modes of Request-for-Quote (RFQ) execution. The result is that dealers will continue to harvest healthy spreads even as they reduce their deployment of risk capital, setting up a scenario of opposing agendas.
Despite this stasis, TABB believes that, operating in tandem, these two opposing forces will lead to an increase of electronic trading to 37% of the overall market in 2016, up from 24% today, measured in notional volume.
In December 2013, Khasawneh conducted interviews with corporate bond dealers, platform and software providers active in the US market to establish the future direction of the market and confirm the current situation at each sell-side venue. Based on research conducted in the second half of 2013, estimates from platforms and FINRA’s Trade Reporting and Compliance Engine (TRACE) breakdowns, TABB estimates that e-trading in the $1 million to $25 million round lot trading bands, which in 2013 represented 13% of electronic notional volumes, will grow, accounting for 21% of TRACE notional volumes in 2016.
Round lots represent the lion’s share growth segment of the overall electronic corporate bond trading market, the area most resistant to change, divided between RFQ orders on multi-dealer platforms and negotiated voice trades with individual dealers, says Khasawneh. “Those best placed to take advantage will be odd-lot platforms eager to extend their offerings as well as a joint response from dealers. The first group has the advantage of fitting in with existing buy-side workflow habits. Dealer buy-in will also be crucial to any platform looking to succeed, but the extent of their ability to cooperate effectively with buy-side needs may make or break platforms.”
The analysis includes the shift in offering from traditional odd-lot providers, such as MarketAxess and Tradeweb, as well as independent dealer-led initiatives such as the Oasis platform. In addition, there is discussion on newer platforms targeting niche markets and the potential for consolidation. These providers include Vega Chi and Electronifie.
The 15-page report with 13 exhibits is available for immediate download by TABB Group Research Fixed Income clients and pre-qualified media at http://www.tabbgroup.com/Login.aspx. For a copy of the Executive Summary or to purchase the research, write to firstname.lastname@example.org.
About TABB Group
Based in New York and London, TABB is the only research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer contributed opinion and analysis covering current industry issues, tracked daily by 18,000-plus professionals; in October, 2013, QuantFORUM, a new online channel for the global quantitative investing community, went live.
Martin Rabkin, 914-420-5739
Source: TABB Group