A new wave of electronic trading platforms is sweeping through fixed income markets, and new research from the Aite Group found that asset managers are turning towards them as a solution to a liquidity gap in the U.S. corporate debt market.
According to Aite’s data, the U.S. corporate debt market increased 44.5 percent to $7.82 trillion since 2008, spurred in part by low interest rates. During the same period, asset managers have increased their corporate debt holdings from $246 billion to $1.45 trillion while new regulations have restricted banks’ ability to provide liquidity to the market. In other words, when the holders of these assets go to sell, there may be no buyers; the U.S. Federal Reserve Bank is so concerned about the liquidity crunch it's reportedly exploring the idea of imposing "exit fees" on managers looking to get out of a position.
“Asset managers are so alarmed about the size of their fixed income holdings and the ability to lay off risk in times of market stress that they are exploring any and all venues for liquidity,” said John Mangano, an analyst with the Aite Group and author U.S. Corporate Fixed Income Trading Platforms: New Entrants.
The result is a push to bring electronic trading to the corporate debt market. Electronic fixed income platforms have been around for deeply liquid markets for nearly two decades, but now there is a push to bring this service to markets like high-yield and municipal bonds, which still tend to be traded over the phone. In his report, he introduces relatively new companies like OpenBondX, Bondcube and Liquidnet Vega-Chi that are attempting to do buy-side to buy-side trading.
Mangano said these new electronic fixed income venues will play a significant role in facilitating liquidity, but their success will depend on adoption by traders and their success during market volatility. During the global financial crisis, liquidity vanished from fixed income platforms, and Aite’s research found no reason to suggest that it wouldn’t happen again.
“Market electronification is key, but it will only go so far,” Mangano said. “The market still runs on information, and people still have that information.”
For now, market participants are taking a wait-and-see approach to the new corporate debt electronic platforms, not wanting to make a commitment without seeing who else is adopting. But without early adoption or scale, Mangano said most of these new entrants would not survive.