An “unprecedented wave of innovation” is reshaping the market structure of corporate bonds trading, claims a report from GreySpark Partners.
In the report, entitled
‘Rebooting the Corporate Bonds Market’
, the London-based global capital markets consulting firm suggests that capital markets regulations – introduced in the aftermath of the 2008 financial crisis – have significantly reduced the amount of capital that broker-dealers can deploy to facilitate client trades.
The various measures of corporate bonds liquidity – daily rates of turnover, the width of bid-ask spreads as well as surveys of investor sentiment – mall point in one direction: credit markets flows are drying out. Consequently, most market participants now describe the secondary markets for corporate debt securities as ‘broken’, the report notes.
It suggests the wider adoption of electronic trading is the key to reducing the market’s reliance on bank balance sheets and the re-establishment of a functioning marketplace. Since 2010, 23 new electronic bonds trading platforms have been launched, and another eight are planned for 2015. “Each of the planned new platforms offers a different trade-off when addressing the ‘impossible trinity’ of price discovery transparency, management of the time mismatch between buyers and sellers and prevention against adverse information leakage,” the report comments.
“The most radical new electronic corporate bonds trading platform initiatives seek to remove the market’s dependency on broker-dealer balance sheets by either cutting banks out of the loop altogether or by reducing them to a pure agency role,” said Russell Dinnage, GreySpark senior consultant and report co-author.
“In practice, however, these platforms still rely on broker-dealers to assist with the formation of tradable prices, or they are requiring their members to forsake anonymity.”
Frederic Ponzo, GreySpark managing partner and report co-author, added that the research concludes that: “The majority of these new trading platforms will no longer be trading in three-year’s time. To survive and then prosper, each platform needs to bring the right trading model to the right participants and then have enough time to see the predicted changes in market participant behaviour become a reality.”
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