The Corporate Bond Market Favors Revolution Over Evolution
What are some of the current trends and issues that clients face in the corporate bond market, as electronic trading has taken on greater importance over the past 12 months? David Parker, Head of MTS Markets International, provides his take on the current marketplace and addresses the "Evolution" or "Revolution" question.
In this interview, David Parker, Head of MTS Markets International, shares his views on the current landscape of corporate bonds and what traders should consider as they enter 2021. MTS Markets International operates the corporate bond ATS, MTS BondsPro, a fixed income trading network of more than 500 buyside and sell-side participants globally.
How has the corporate bond market structure developed over the last few years? What have been the biggest trends you have witnessed?
Over the last two years, electronic trading has rapidly matured. Volumes traded and processed electronically have grown sharply with almost every major market player now using electronic trading as a fundamental part of their business. However, because there are a lot of different options available – involving both different trading models and pricing– the amount of complexity and fee models have also increased. The result is that firms that want to be active in electronic trading risk being charged multiple times to access liquidity across several venues.
That is where we see the opportunity for a revolution in the space. The multi-venue, volume-based fee format is a product of the past and only serves to create duplication of costs for traders. We see the opportunity for a more supportive structure with a consistent, forecastable fee. This model ensures that trading participants don’t have to hunt for liquidity across different venues via multiple separate channels, each of which represents an expenditure of time and money.
What challenges has the fragmented credit market landscape brought up for traders?
The fragmented landscape, heightened by the sheer number of electronic trading venues, has traders searching for the liquidity they need – sometimes across six or seven venues. This naturally increases cost and pressures for all those involved. To overcome this, and to better support the trading community, there needs to be more centralized liquidity and easier access to different pools in a single place. It is also worth noting that it’s not just about liquidity, but also about prices: what is the real market-wide price for a given security, and how deep is it? That’s important to know pre-trade, but the current market landscape makes it hard to do so. It’s an age-old problem, and one that technology has the power to address…but so far has had limited success in doing so.
Do you think the growing popularity of all-to-all markets is a response to these challenges? How does the all-to-all model help meet the needs of traders?
Definitely. Not having artificial constraints on who can trade with whom is a great way of bringing different providers into one central place. The all-to-all model allows the market to become more consolidated and improves access to traders. This shortens the search process and provides greateraccess to liquidity. It also helps spread market information around prices more broadly, which helps to get people more comfortable with taking risk in the asset class.
What do you think are the key features which corporate bond market participants should look for in a trading platform?
I think that bond market participants should be aware of two key features when looking at an all-to-all platform.
The first is obvious – cost. In particular, participants need to be aware of hidden costs. A lot of features labelled ‘free’ to the buy-side are expensive to dealers – with the cost being charged directly back to the buy-side as part of the price they see. Of course, venues provide a valuable service and should be compensated, but the amount should be reasonable and transparent.
Secondly, although certain specific platforms may be effective at meeting niche trading needs, having to sort out prices from across many different venues adds costs and complexity. So it’s important to consider both a platform’s current and realistic future scale. A vital factor there is its degree of openness to liquidity providers/participants. If a venue has impediments to new users or a high cost for participation, you are going to be seeing only a subset of liquidity via that channel. And importantly, you are likely to then have to find additional channels to reach the liquidity that doesn’t qualify for that particular venue but is still valuable.
What is new at MTS?
As the electronic venue landscape continues to evolve, firms have become more sophisticated. At MTS, we introduced a new user interface with a host of features – such as allowing more nuanced bilateral trading relationships to be established and developed within the all-to-all concept – with the aim to provide top notch performance in terms of speed, accessibility, flexibility and confidentiality.
Price is also something we’re hyper-conscious about and something our clients have highlighted as a big concern for their business overall. For example, our direct trading model is extremely inexpensive, with a clear upfront fee structure that is actually reduced as volume grows.
As always, our all-to-all platform helps lower the bar for new entrants and alternative liquidity providers, allowing market makers to compete in different ways and providing the kind of price information that makes end investors comfortable moving more risk into the corporate bond market.
Originally published by TabbForum