Electronic Bond Trading Platforms Seek to Attract Larger Orders

  • Platform operators speaking at AFME conference in London
  • Transparency makes it difficult to trade large chunks of debt

Electronic bond trading is struggling to attract large orders. Platform operators are looking to change that.

Proposals for increasing trade sizes include better matching buyers with sellers, improving data on bank inventories and providing access to private forums, according to officials scheduled to speak at an Association for Financial Markets in Europe conference in London on Thursday.

One of the main challenges is that the transparency of electronic platforms can affect prices. Alerting other investors that you want to buy or sell large chunks of debt allows them to steal a potentially profitable trade by executing an order ahead of yours. Investment managers sometimes get around this by breaking up trades, which can be costly and complicated.

“Everyone is looking to grow the size of trading on electronic markets,” said Simon Linwood, head of credit at electronic bond trading platform MTS Group, which is majority owned by London Stock Exchange Group Plc. “More connectivity between investors and dealers on platforms would make it easier to trade larger sizes.”

Phone Discretion

Electronic platforms are trying to change a system where, for decades, buying and selling has taken place over the phone among investors who prize discretion in the thinly traded market. The average electronic trade size for credit globally is about $550,000 to $650,000, according to Scott Eaton, chief operating officer of MarketAxess Europe Ltd.

“The perception is that electronic platforms are best for smaller size, but we’re seeing growth in block trading,” said Eaton, who’s also speaking at the European Fixed Income and FX Market Liquidity Conference. Block trades are at least $5 million, he said.

Electronic trading now accounts for more than 20 percent of transactions in high-yield bonds and 40 percent of dealing in single-name credit-default swaps, according to Bank for International Settlements. The growth of that market may reduce liquidity during times of market stress, BIS said.

“We are looking at how we can get larger sizes executed on our platforms and more inventory data is one of those ways,” said Linwood. “In the coming years, platforms should become more connected with potential mergers and acquisitions, and that would help larger trades.”

SIX Swiss Exchange will start a bond trading facility this year to help traders access large portions of bonds by focusing on private trading platforms known as dark pools. The platform is targeting minimum trades of 2 million euros ($2.2 million), or the equivalent in pounds or dollars.

“In recent years it’s become harder to get large deals done,” said Byron Cooper-Fogarty, head of fixed income sales at SIX Corporate Bonds, who’s also speaking at the conference. “For trades of 1 million euros or larger, it becomes increasingly difficult to locate who’s holding that liquidity. Electronic platforms need to evolve to target larger trades where liquidity is so difficult.”