US corporate bond trading automation pegged as key technology priority for 2024, finds report

With trading volumes for US corporate bonds up 34% year-on-year, the only feasible way to meet this demand is to price and quote bonds faster than a human could via point-and-click, finds Coalition Greenwich report.

By Wesley Bray

Building on top of the increased electronification of the US corporate bond market over the past decade, trading automation is now the key focus area according to a new report from Coalition Greenwich.

The majority of surveyed participants (65%) told Coalition Greenwich that their primary technology priority for this year was automating parts of the corporate bond trading process.

The US corporate bond market saw trading volumes increase by 34% year-on-year, with average daily trade count up by 20%. Meanwhile, average ticket size was down 16% in the same time frame, and investment grade (IG) bid-ask spreads were down 44%.

These figures, although largely positive for investors, have resulted in the dealer community being required to become increasingly efficient in their client liquidity provisions.

According to the report, the push toward automation is twofold. Institutional investors are more frequently expecting near-instant liquidity when trading corporate bonds, with more than 40% of the total notional volume of IG bonds now traded electronically.

The only feasible way to meet this need is to price and quote bonds faster than a human could via point-and-click, hence growing demand for automation.

Another angle is the market’s newfound transparency which is making it more difficult to for dealers to capture the profit margins they previously did on each trade. As a result, the same number of traders or less are handling an ever-increasing amount of client orders.

For traders to handle more clients and increased orders, automation is the only way to achieve this while still maintaining the same level of service they always have, Coalition Greenwich argued.

Automation can also allow traders to spend more time on areas that are more manual such as gathering/providing market colour and handling block/portfolio trades.

The report did note that the push towards automation is largely driven by the largest global dealers and non-bank market makers. However, third-party technology providers are increasingly able to offer highly customisable auto-quoting and auto-execution solutions that allow dealers with less technological resources to compete. 

“The fixed-income market is moving into the next phase of electronic trading in which trade execution is not simply electronic, but fully automated,” said Kevin McPartland, head of research at Coalition Greenwich Market Structure and Technology, and author of the report. 

“Interest in fully automated trading is not limited to the biggest corporate bond liquidity providers. Nearly two-thirds of corporate bond dealers see increasing automation in the trading process as a top technology priority for 2024.”

Tagged: Coalition Greenwich