Investors expecting electronic trading platforms to provide urgently needed liquidity in emerging market credit are likely to be disappointed, at least until consolidation occurs among providers, believe asset managers in Europe.
“None of the new platforms are really active yet in providing meaningful resources to execute trades,” Nick Robinson, head of trading for fixed income at Schroder Investment Management in the UK, told AsianInvestor.
Recent years have seen several initiatives launched to provide electronic trading of bonds, including MarketAxess, Tradeweb and Bloomberg.
But this Spring BlackRock abandoned its internal Aladdin Trading Network, just a year after setting it up, and opted to link 60 of its largest clients to MarketAxess instead. This partnership could presage additional buy-side to sell-side crossing.
There are still plenty of buy-side networks offering various degrees of participation. “Of the nine or 10 initiatives out there, some are looking to be buy-side only and some just want real-money investors, while others allow high-frequency traders and hedge funds too,” said Robinson.
Asset managers have been seeking alternative sources of liquidity to compensate for the reduction in conventional providers in the secondary market. The boom in emerging market debt issuance since the global financial crisis of 2008/09 and the reduction of fixed income inventory levels at investment banks has seen trading volumes as a share of total market cap drop markedly (click on graph).
“You used to be able to sell $5 million clips on a regular day,” noted Jon Brager, senior credit analyst at Hermes Fund Managers. “Now that number is $2-3 million.”
Robinson pointed to three obstacles to greater pick-up in e-platforms. The first is that it’s often hard to establish liquidity. For example, the UBS price improvement network (PIN) was effective at getting buyers and sellers together, but failed to match a significant number of bond trades.
The challenge is a big one because the corporate bond universe is very large yet thinly traded. Robinson estimates there are about 300 different types of US Treasuries and 35,000 different investment grade bonds in the US. But average volume is about 30,000 US IG corporate bond trades per day.
“Given that the most liquid [bonds] trade 100 times a day [in the US], this means that the least liquid will trade once every few months,” he noted. In Europe and the UK, there is even less liquidity.
Secondly, even when a manager’s execution desk finds a counterparty to trade with, views on price can be hard to reconcile, especially for less liquid bonds that trade on a monthly basis. And because electronic platforms reach a wider range of brokers, a counterparty is less likely to be known to the manager, so no pre-existing relationship is available to help smooth the process.
Lastly, managers may also be reluctant to use electronic networks because of information leakage. If a trading order is put out to several brokers and isn’t filled, the market knows that a given manager is looking to sell and therefore it may become more expensive to execute. Phoning one or two preferred brokers keeps the information closer.
Brager expressed the view that there wouldn’t be much value to be had from electronic solutions until a few leaders emerge, commanding the bulk of flows.
“There are still so many different platforms and you need a few for it to work. We need a degree of consolidation,” he said.