Using Technology to Enhance Liquidity

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Electronic trading is growing in the fixed income credit space. According to Coalition Greenwich, corporate bond e-trading in August 2022 increased 58% year-over-year, with 42% of Investment Grade and 30% of High Yield transacting on an e-commerce platform.¹ Technological advancements are welcomed by many market participants, but in its current forms, e-trading often disintermediates dealers from their customers. However, new technology is democratizing e-trading, using pre-trade data and a new protocol to keep dealers in the center of their trading activity with their customers and increase trading opportunities for all market participants.

This technology, driven by LTX, A Broadridge Company, improves the efficient functioning of the trader’s day-to-day activities and offers better and smarter workflow solutions for their clients.

Pre-trade, actionable liquidity signals

In the mostly opaque, illiquid corporate bond market, finding natural buyers and sellers is difficult while current forms of pre-trade data are backward-looking and limited, particularly for older bonds. Trading is concentrated in more recently issued bonds - upwards of 70% of trading volume is derived from bonds issued in the last 2.5 to 3 years.² It is easier to gather market data about these bonds, and many market participants take comfort knowing that it will be easier to sell these bonds if the need arises. But often, more seasoned bonds with similar coupons and maturities, plus higher yields, from the same issuers are shunned.

Market participants can now use data to discretely identify trading opportunities in less liquid bonds and quantify the viability of these trading opportunities in the current market. Using new technology, robust liquidity signals can help traders engage potential counterparties with complementary trading interests.

Democratizing trading with access to liquidity

Pre-trade data is increasingly important. By using forward-looking data and technology to connect natural buyers and sellers, dealers can increase opportunities for riskless principal transactions. Using data, dealers can identify where the best opportunity can be found: whether liquidity is coming from a dealer’s customer base or another dealer.

“Firm looks” for liquidity provision

Unlike other protocols that simply ask for a quote, a new trading protocol allows dealers to respond to a firm level coming from the buy-side. In advance of the order, the ability to canvas the market can bring new liquidity to both the buy-side and dealers’ trading desks.

Opportunities in a challenging environment

2022 has marked the start of a challenging environment for corporate bond traders as the Fed tightens policy. The market is two times bigger than it was in 2005, with $4.6T principal outstanding at the end of 2005 vs $10T at the end of 2021.³ Rising rates and scarce liquidity continue to create costly and time-consuming challenges. But innovative technology and data will help democratize trading and increase opportunities.

1. https://www.greenwich.com/market-structure-technology/september-spotlight-corporate-bond-e-trading-58-year-over-year-august

2. Based on TRACE data: https://www.finra.org/filing-reporting/trace/trace-fact-book

3. https://www.sifma.org/resources/research/fixed-income-chart/