Rebooting the Corporate Bonds Market


Electronic Trading to the Rescue of a Broken Market

GreySpark Partners presents a report examining how an unprecedented wave of innovation is reshaping the market structure for corporate bonds trading. A re-evaluation of the corporate bonds market’s trading model by buyside firms and investment banks active in the marketplace is necessary because, between 2007 and 2014, secondary markets liquidity dried up.

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For example, between 2007 and 2014, the size of the global secondary market for corporate bonds trading grew by 47% to USD 48 trillion. However, the average daily rate of turnover of corporate bonds traded in the US, which is the most liquid market for the securities, fell during that seven-year period by 48%. The steep decline in turnover rates meant that the majority of corporate bonds liquidity became concentrated on buyside balance sheets where it increasingly could not be traded back into the market due to Basel III-induced pressures, which are forcing the sellside to shrink its balance sheets.

As a result, 23 new electronic corporate bonds trading platforms were launched by a range of different types of market participants between 2010 and 2015. In 2015, there are at least a further eight platforms in various stages of pre-launch development. However, GreySpark found that none of the platforms developed to address the squeeze on secondary credit markets liquidity are providing a fully electronic solution to the problem.

Instead, the design of each platform type – specifically, all-to-all, client-to-client or dealer-to-dealer – highlights the existence of a so-called ‘impossible trinity’ within the market structure for corporate bonds trading. This ‘impossible trinity’ prevents the development of a fully electronic, platform-based solution to the corporate bonds liquidity drought.

This report characterises and examines how, in 2015, each type of live or planned electronic corporate bonds trading platform provides an answer to the liquidity challenges faced by credit markets investors. The report concludes that, for one platform model to succeed long-term over another, an equitable trade execution facility that offers market participants transparency in the price discovery process, the ability to manage the time mismatch inherent to corporate bonds trading while also protecting against information leakage must be developed.

Published on: 1 Mar, 2015

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Rebooting the Corporate Bonds Market – Table of Contents

  • Introduction
  • 1.0 One Size Does Not Fit All, Anymore
    • 1.1. The Two-tier Marketplace
    • 1.2. A Regulatory Death Sentence
    • 1.3. The Unintended Consequences
  • 2.0 Templates for a New Market Structure
    • 2.1. Solving the Liquidity Trilemma
    • 2.2. Tapping All Sources of Corporate Bonds Liquidity
    • 2.3. The Different Types of Electronic Trading Venues
  • 3.0 Winning Hearts, Minds and Critical Mass
    • 3.1. An Unprecedented Wave of Innovation
    • 3.2. Client-to-Client: Cutting Out the Middlemen
    • 3.3. All-to-All: A True Agency Model?
    • 3.4. Dealer-to-Dealer: Oiling the Wheels of the Existing Market Structure
    • 3.5. Integrating Wholesale and Retail Flows
  • 4.0 Conclusions