Wednesday, June 3, 2020 Stamford, CT USA — The unprecedented volatility triggered by the COVID-19 crisis demonstrates the importance of preserving and even expanding liquidity in corporate bond trading as the market is transformed into a more electronic and transparent version of itself.
Since the financial crisis, the corporate bond market has been in a constant state of change. In the midst of that evolution, the still-emerging market structure was plunged into its first true test by the COVID-19 crisis and while it has held up well, market participants know there are still many more changes to come.
According to a new report from Greenwich Associates, buy-side and sell-side firms estimate that within five years up to half of corporate bond trading volume could be executed electronically. The continued electronification of the market has occurred in parallel with the sharp decline in dealer bond inventories prompted by recent regulatory reforms.
“There are real concerns about liquidity shortages during a crisis,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology group and author of Improving the Search for Corporate Bond Liquidity - Greater and Smarter Transparency. “While it is a relief that the market has proven resilient to this point, the crisis is showing how important it is to continue working to improve markets and market structure as the market continues to evolve.”
The current trajectory of the market’s evolution gives reason for optimism, with increased transparency coupled with reduced information leakage topping market participant demands. More information on who holds what bonds, how every bond is actually executed and actionable information about a bond’s liquidity profile are increasingly available with the advent of artificial intelligence and unique data sets, and will benefit dealers and investors alike.
“The tools and technology available to dealers and other liquidity providers will help the buy side execute difficult trades more efficiently and at better prices, all while ensuring capital is used even more efficiently than it is today,” says Kevin McPartland.