Fixed income markets have undergone substantial structural and technological shifts over the last few years, particularly in the ever-evolving US corporate bond market. But while there has been solid momentum gained in electronic trading during that time, there remains a litany of challenges. From continued usage of legacy systems to uncertainty on regulatory parameters, corporate bond markets are undoubtedly ripe for innovation. As we approach the end of Q1 in what has already been an action-packed and volatility-filled year, 2022 could mark the watershed moment in corporate bond markets that folks have been waiting for with bated breath.
A shift in the playing field
Corporate bond markets have historically been driven by long-standing relationships with dealers providing the best available prices for their buy-side counterparts. Pricing transparency was very limited to a select group of market participants – namely sell-side market makers who were always able to dictate best price due to their centralized position in the bifurcated market.
That is no longer the case. From the role that MiFID II has played in shifting the relationship between the buy and sell-side, to the heightened levels of sophistication in execution platforms, trading algorithms and APIs, the buy-side is playing a much more prominent role in price discovery and market-making.
In fact, according to a Q4 2021 report by Coalition Greenwich, buy-side electronic trading grew in every asset class over the last year with the exception of interest rate swaps. And with buy-side trading desks continuing to increase their budgets for technology, the scales that once heavily tipped in favor of the sell-side appear to be moving towards an industry-wide balance.
Impact from the regulators
SEC Chairperson Gary Gensler has emphasized that he wants to “level the playing field” in the fixed income market. More specifically, he’s aiming to make pre-trade price information more transparent and accessible to corporate bond investors and believes trading data should be more broadly disseminated.
Going back to last fall, Chairperson Gensler has made it a priority to “bring greater efficiency and transparency” to the trading of corporate bonds, and is also putting a focus on municipal bonds and mortgage-backed securities. As it currently stands, corporate bond trades are required to be reported to TRACE within 15 minutes of execution.
While there have been whispers of a more transparent and centralized reporting system similar to that used in equity markets, time will only tell what steps are taken to shine greater light on corporate bond markets. Market structure, regulation and the overall trading process in equities differ greatly from fixed income markets. That being said, we should expect at least an initial step in the new direction of corporate bond price transparency this year.
Moving the needle forward
Electronic trading is the best and most efficient way to improve price transparency, but it has yet to hit that market-wide tipping point. In order for the market to become fully transparent, all investors need maximum access, from the largest sell-side institutions to the start-up hedge funds.
Although there are a litany of trading languages and communication channels that are employed across the fixed income ecosystem, a new wave of innovative solutions have been introduced to the market that mitigate these challenges and streamline workflows. While price dissemination and accessibility processes are evolving, it’s no secret that pricing data can still be more easily accessed and distributed due to the continued growth of electronic trading. The more people that have access to this data, the more transparent the market and the more balanced the playing field.
If you have thoughts on transparency across the corporate bond and even the broader fixed income markets, please reach out to us at info@multilynq.com.