Tuesday, January 14, 2020 Stamford, CT USA — Concerns about liquidity problems in corporate bond markets all but evaporated in 2019, due in large part to new technology that allows both the buy side to make up for smaller dealer balance sheets and banks to provide liquidity more efficiently.

“For the last several years, we wondered if the new market structure for trading corporate bonds—one where the role of dealer capital was lessened and technology involvement increased—was sufficiently robust to carry on for the long term,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology group and author of The Automation of the Bond Market. “We’re not wondering anymore.”

Electronic trading of investment-grade corporate bonds grew 56% from January through November of 2019 and now accounts for over 32% of average daily volume, according to Greenwich Associates data. However, aggregate volumes traded on electronic platforms actually understate the impact that new technology is having on the corporate bond market by a wide margin. 

For example, nearly two-thirds of the investors participating in a new Greenwich Associates study say the growing presence of electronic market makers (EMMs) is improving liquidity in the market.  Forty-two percent agree that competition from these new arrivals is forcing the big banks to improve their technology and a quarter believe electronic market makers are pushing big banks to improve liquidity provisioning.

Nonbank EMMs had until recently stayed away from corporate bond trading. One reason for this was the lack of an easy and liquid hedging vehicle that would allow for continuous and precise risk management. “ETFs changed all that,” says Kevin McPartland. “Corporate bond ETFs, although originally designed to give retail investors easier access to credit markets, proved hugely useful for not only investors but market makers as well.”

ETFs have also played a huge role in what was perhaps the most talked about growth story in corporate bond markets in 2019: portfolio trading—with large improvements in corporate bond market data quality and accessibility. Almost 55% of study participants said they executed a corporate bond portfolio trade in the past year, with another 6% expecting to in the coming year. 

More generally, automation is playing a big part in the market’s leap forward. Dealer auto-quoting, continuous streaming, buy-side auto-execution and portfolio trading all serve as prime examples of corporate bond market automation. Thirty-eight percent of corporate bond investors are currently leveraging auto-execution functionality for at least some of their trading.