The proportion of electronic trading in 2023 within US credit markets is proving stubbornly resistant to growth. Research by market structure analysts, Coalition Greenwich, has found a ‘glass ceiling’ of 40% electronic trading for investment grade bonds and 30% for high yield.
That does not mean there is no volume growth the average daily notional volume (ADNV) in US markets was found to have risen 8% year-on-year in September and was up 17% over August. High-yield volume in September did not increase year on year but was up 13% on August.
Understanding how this impacts trading is complex. There are signs that liquidity is improving overall; not only are volumes up, but we have seen bid-ask spreads falling across the year and there has been an increase in sell-side inventory of corporate bonds, which is supporting that drop in spreads and increasing the capacity of market makers.
That change to inventories is critical as falling inventories have been a consistent challenge during the last ten years.
“Most holdings are on the short end of the curve, five years or less, where most of the rate increases are already baked in, and where the majority of corporate borrowing happens,” wrote Kevin McPartland, head of research for market structure & technology at Coalition Greenwich in October. Holdings of bonds with maturities of five years and more are nearly zero. Yet, while the average net position for 2023 through September has grown and is nearly double the average holdings in 2022, which was the low, it remains close to its lowest level in more than a decade.”
Secondly trade sizes have been falling and trade count is up, making it more likely that electronic platforms can find the other side to a trade in credit markets. This allows new investment entrants, who are typically trading odd lots, to access the markets via electronic platforms more readily, boosting the number of counterparties and potential liquidity providers.
“IG markets averaged just over 92,000 trades per day in September, up 15% year over year, and high yield just under 16,000, down 7% year over year,” McPartland noted. “More staggering, the IG tally is 89% higher than it was in September 2019. Yes, times have changed.”
Third, the changes to electronic trading protocols are allowing a more efficient – either in price or time – transfer of risk between parties. whatever the volume, if the trades being conducted are qualitatively better, then e-trading is delivering to the end investor.
©Markets Media Europe 2023
