THE Singapore Exchange (SGX) has led a US$53 million growth equity financing round in Trumid, a New York-based startup that runs an electronic corporate bond trading platform.
Bond trading is undergoing a quiet, but fundamental change: The automation of smaller-sized bond trades. Certainly, we are in the early days of this analogue-to-digital conversion, but the effects on the microstructure of bond markets are likely meaningful – especially with respect to the costs of execution. If you think smaller trades are not relevant in corporate bond trading: 90 percent of all trades are worth less than $ 1 million. In this blog post, I elaborate on how and why banks are starting to replace dealers with machines and describe why this is fertile ground for new electronic trading platforms. Finally, I propose a hypothesis on how trading costs may evolve in the future.
Report exploring innovation in bond markets addresses the recent proliferation of bond trading platforms.
Monitoring the recent boom in electronic bond trading platforms is presenting new challenges for regulators, according to the International Organisation of Securities Commission (IOSCO).
A report authored by IOSCO explained regulators are faced with monitoring activity in the bond market as it shifts to new trading venues and counterparties.
As of January this year, 128 bond trading platforms were available to fixed income market participants as traders seek new technology to improve connectivity and electronic trading.
This boom in innovation has seen traders readily embrace electronic trading and a variety of alternative protocols offered to meet bond market needs.
However, IOSCO explained this has led to fragmentation and difficulties for those trading the bond market, highlighting the importance of connectivity.
The report explained many corporate bonds do not frequently trade and the corporate bond market and market quotes are often unavailable or unclear.
It also said the proliferation of electronic trading platforms has created a set of challenges bond traders in identifying which are the best counterparties and platforms to utilise for any given trade.
The now fragmented nature of the fixed income market with increased electronification has raised the importance of integrating multiple platforms to allow re-aggregation of liquidity across liquidity pools.
New bond platforms entering the market face navigating the sometime competing demands of different market participants - many of whom look for tailor solutions.
“Along this unique order custody chain, difficulties in parsing prices marketed simultaneously on multiple platforms have also emerged, creating the appearance of duplicate orders and misrepresented market liquidity,” IOSCO said.
IOSCO also referred to the Deutsche Boerse-backed dark pool, Bondcube, which failed in 2015 after just three month when more than 500 buy-side-to-buy-side participant matches yielded only a handful of trades.
“New trading venues may struggle with the capital and resources needed to withstand the high level of competition and long ramp up time often necessary to gain sufficient market support to build a revenue base,” the report explained.
IOSCO concluded market concern remains around the sheer number of corporate bonds available to trade, the lack of a centralised liquidity pool and “many different execution preferences by market participants will make it difficult to achieve rapid increases in efficiencies for locating and pricing securities.”
The explosion of new fixed income trading venues shows no signs of letting up.