Electronic trading in the $8 trillion U.S. corporate-bond market is beginning to heat up.
A shift toward computerized buying and selling has taken place over several years, and the market is “finally” maturing, according to Kevin McPartland, head of market structure research at Greenwich Associates LLC, a financial-services consulting firm.
“The buy and sell side have accepted this is good for the market, and it’s here to stay,” McPartland said in a phone interview. After a long history with many failures in the market, current electronic-trading models actually work, he said. The research firm’s data shows that high-yield bonds have had an even stronger surge in adoption in past years.
The market still faces a challenge in larger trades.
“If you’ve got a 10-year bond that you bought three years ago with a $150 million position, you’d struggle to sell that right now,” said Dom Holland, head of fixed-income electronic markets at BNY Mellon Markets. “It’s difficult for customers to move large pieces of older issues and to exercise some of the investment strategies that they’d like to do.”
While improved liquidity for trades under $100,000 is a good sign of growth for the market, the number of so-called round-lot trades — those over $1 million — have actually diminished slightly, he said.
And, even as electronic trading makes gains, Wall Street is maintaining its jealous hold on the market. Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and their peers, in their role as debt underwriters, possess the power to allocate newly issued bonds to favoured clients. They also have the best access to price data, in part because only they can see trades done between banks.
About 80 percent of U.S. bond deals are still done by phone or over a chat service. The majority of corporate bonds aren’t well-suited for computerized trading because the relative lack of supply makes them sensitive to price information. Investors don’t want to tip their hand on a planned trade by broadcasting it on a computerized service, as any forewarning risks pushing prices higher or lower for themselves before they’re done their trade.
TruMid, a bond-trading start-up which specializes in trades above $1 million, recorded its biggest weekly volume ever last week, according to company president Mike Sobel.
“You’ve seen a pretty big shift in the landscape,” he said in a phone interview, emphasizing that there should be more trading overall, including electronic-based, in a rising interest-rate environment.