Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Corporate-bond brokers can be a lot like matchmakers. 

They're trying to bring together investors who share common, specific interests for the right price at the right time. Each side wants to reveal just enough to seem alluring but not too much so that the mystery evaporates and a bidder lowers the price. 

So it makes sense for an electronic credit-trading system to at times bear greater resemblance to Tinder or eHarmony than Fresh Direct.

Enter the dark pool.

MarketAxess, which manages the dominant electronic system for U.S. corporate-bond trading, is adding some dark-pool capabilities as an additional feature of its existing credit-brokering platform. Liquidnet launched a dark pool for company-debt trades last year. (Bloomberg LP, the parent of Bloomberg News, owns a stake in a company, Bids Trading LP, which operates a dark pool. )

Here's how these dark pools can work: Investors make a list of what they're looking to buy or sell that others can't see. If another trader expresses interest in a specific security that the investor has listed, they are both alerted about the other's interest and they can decide to negotiate further from there. 

This arrangement is advantageous for those who want to mask their intentions and conduct transactions without substantially moving markets against them. After all, potential bidders will often lower their offered prices if they sense that the seller needs to liquidate a large position.

There's a big reason so many brokers are looking for the secret sauce to efficiently match buyers and sellers of corporate bonds: The amount of such debt outstanding has more than doubled since 2007, yet there are many fewer traditional gatekeepers to this market, namely human traders at banks.

Bond Boom
The U.S. corporate-bond market has ballooned, but trading hasn't kept pace
Source: The BofA Merrill Lynch US Corporate & High Yield Index

Those that remain have increasingly relied on their relationships and persistence to make matches among the swelling pool of investors, especially because they aren't using as much of banks' own money to facilitate trades. This process can be inefficient and by many accounts has resulted in a more choppy and frustrating market.

Dark pools have a less-than pristine reputation among equity investors because of suspicions about improper advantages given to high-frequency traders. But they also have facilitated bigger trades without causing big disruptions to prices.

While investors in U.S. credit markets still trade primarily through humans, electronic marketplaces are becoming more prevalent. About 15 percent of investment-grade trading took place on MarketAxess's electronic system in the three months ended March 31, up from less than 14 percent a year earlier. And a greater proportion of activity is taking place between investors as opposed to dealers and buyers.

Inching Up
Investors are gradually adopting some use of electronic systems to trade corporate bonds
Source: MarketAxess

It makes sense that MarketAxess and LiquidNet are trying to gain enough interest in dark pools to have a viable alternative market.

Such digital matchmaking will most likely never fully overtake the old-fashioned method of a seller and buyer meeting up through a trusted friend, to continue the dating analogy. But it'll be another outlet when investors realize they're holding onto the wrong bond, or when the bond they loved slipped away. Sometimes you need all the help you can get.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net