Electronic Bond Trading Faces ‘Darwinian’ Struggle, HSBC Says

Electronic corporate bond trading platforms face a “Darwinian” struggle over the next two to three years, Niall Cameron, global head of credit trading at HSBC Holdings Plc said in an interview yesterday.

On the proliferation of banks setting up electronic bond trading platforms:

“Liquidity is very fast moving. People will see there is another model with more liquidity, better spreads or better execution and they’ll move their business over by the flick of the switch. It is a Darwinian process as lots of models will start but they won’t all work. Within two to three years we should see a map of the winning strategies. There could be up to ten winning platforms.”

On market liquidity:

“Dealers in corporate bonds put out streaming prices into various systems but they may not actually have positions. They might not hold that bond in their inventory. These indicative prices may give an impression that there is more liquidity in the market than is actually the case.”

On pre-trade and post-trade transparency proposed by Mifid II, the Markets in Financial Instruments Directive:

“Many of the regulations coming out look on the surface like they’ll hurt liquidity. Post-trade publication pricing makes it more difficult for the larger fund managers to execute large trades because they have to show the market their hand. There are also some worries about the potential for pre-trade transparency because that could discourage dealers from providing pricing at all.”

On banks cutting their inventory of corporate bonds:

“The secular shift to banks running lower balance sheets is here to stay. A combination of risk-weighted asset control and a global desire from regulators to reduce risk has caused dealers to keep their inventory of corporate bonds low.”

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