Trading platforms | Fixed income H
ooking up bond traders looking for deals used to be easy, but asset managers have been desperately searching for new
sources of liquidity since banks were pushed out of the business. The corporate debt market has been punished by the limits that regulations have imposed on banks’ trading activity. Basel III is racheting up the capital requirements for banks to hold inventories of bonds, while the Volcker Rule, part of the Dodd-Frank Act in the US, is preventing banks from trading off their own book. The nature of the bond market makes it more susceptible to liquidity droughts than other asset classes. Companies issue bonds to meet particular cash fl ow needs, creating a much broader range of instruments for each fi rm than is found in the equity markets and each instrument is much less actively traded as a result. Jim Rucker, credit and risk offi cer at bond- trading platform MarketAxess, says, “In the US high grade market there are something like 45,000 different instruments, which goes up to 75,000 if you include high yield bonds. According to our analysis, when you look at the market as a whole, there are only approximately 20 bonds that trade each day on both sides of the market in
institutional size. So, very few bonds have anything close to a two-way market during the day. That means dealer capital has been very important to the market.”
Having peaked at around $235bn in 2007, sell-side inventory levels are now around $40bn. For the bond trading market losing this capital commitment is a concern. “More than 70% of the total corporate bond inventory is now owned by insurance funds, pension funds or large asset management organisations,” said Jean-Philippe Male, CEO of Galaxy MTF. Wedded to the widening of spreads – which Larry Fink, CEO of BlackRock, observed was a probable effect of the new regulation – it is a disaster. “The market is very unhealthy; prices from banks and counterparties are very poor,” said one asset manager, who asked not to be named. “Bloomberg All Quote has prices on it but when you try to trade they disappear. I never saw such bad liquidity in the market as it is today. Three or four years ago after Lehman there was a brief patch but now it’s a prolonged period of illiquid markets. We are saying here that we’re glad we don’t have any big orders because the market just couldn’t absorb them.”
Best Execution | Autumn 2012
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