Bond markets, like equity markets, are experiencing increased competition for trading volume, suggest the results of a survey published on Wednesday by the U.S. Securities Industry and Financial Markets Association (SIFMA).
The SIFMA survey found that bond market structure is evolving amid a rise in electronic trading, with several new entrants offering, or planning to offer, electronic trading services. Indeed, seven of the 19 platforms the survey reviewed have entered the market in the last two years, and that four more platforms plan to launch in 2016.
According to the survey, the 19 trading platforms reviewed offer a total of 42 different trading protocols, as innovations in this area are being made to improve price discovery. Additionally, electronic trading platforms are “increasingly targeting larger sized trades and providing various methods to protect anonymity and to better protect investors,” SIFMA says in a statement.
Innovation is primarily happening in the corporate bond market, SIFMA adds, while change in the municipal bond market is likely to happen more gradually.
According to the report, both regulatory and market factors are driving the rise of trading competition. On the regulatory front, post-crisis reforms, including higher capital charges and measures such as the Volcker Rule are impacting trading activity and liquidity, the report says. Additionally, the report notes that there is increased regulatory attention on best execution requirements and the need for greater pre-trade transparency.
The overall size of the bond market has increased substantially, the report says but dealer inventory has not kept up. “Due to both regulatory changes and market conditions, dealers have rationalized the breadth of their business, and some have refocused on core products and clients, resulting in reduced market making activity in certain markets,” the report says. “Increased discussion and concern about market liquidity has accentuated the desire for connectivity and increased the focus on liquidity planning.”
The report aims to demystify some of the changes that have taken place in bond market structure over the past couple of years, noting that “there is limited information” on the trading platforms’ functionality, and the evolving price discovery and execution protocols.
“Fixed income electronic trading platforms are investing in new technologies and finding innovative and creative ways in which to both aid price discovery and to enhance access to market liquidity,” says Randy Snook, executive vice president, business policies and practices at SIFMA, in a statement.
“This report is intended to provide useful information to market participants about the existing and a number of emerging electronic trading platforms and trade execution protocols, as increased competition among the players shapes this space. The information from this survey will help to inform a constructive dialogue around fixed income market structure with both market participants and policy makers,” he adds.