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Electronic Corporate Bond Trading at the Crossroads

Traders Magazine Online News, February 12, 2018

Ivy Schmerken

The conversation in electronic corporate bond trading has shifted away from focusing strictly on liquidity to gathering data and analyzing relative bond pricing.

“The Holy Grail in the marketplace is pre-trade transparency and it’s very hard to get that transparency,” said James Switzer, head of credit trading at Alliance Bernstein speaking at Tabb Group’s Fixed Income 2018 conference.

On the panel, buy-side traders debated whether more pre-trade transparency is needed to boost their activity on all-to-all electronic platforms, which allows buy-side traders, dealers and hedge funds to trade with one another. “So the chicken and egg of data and trading is that the data really has got to come before the trading?” asked Larry Tabb, founder and research chairman of TABB Group, who moderated the panel.

By grabbing this data from platforms and data providers, asset managers can see what percentage of flow is out there and have more confidence in routing orders to venues. At least that’s the theory.

However, heads of fixed-income trading desks from major banks (Citi and JP Morgan Asset Management) on an earlier panel said that too much transparency could hurt the ability of banks to hedge their positions and get a decent return on capital. While broker dealers are mandated to report their corporate bond transactions to FINRA’s TRACE system, there could be attempts to expand that transparency to pre-trade as with Europe’s MiFID II. “The argument should be around the calibration of that transparency,” said Brian Archer, managing director and head of credit trading at Citi, noting that clients need enough time to enter their positions.

In terms of e-trading adoption, the buy side suggested that pre-trade transparency and automation of small trades are driving their decisions.

“I believe it’s about efficiency first, liquidity will follow,” said Switzer on the Evolving Nature of Execution panel.

“Efficiently consuming information that is coming into the firm and creating technology around that is really part of our DNA now and that is how we process it,” said Switzer, referring to a bond software package that he co-developed in 2015.

In 2015, AllianceBernstein began using Automated Liquidity Filtering & Analytics, or ALFA, to monitor electronic trading venues and alert users when there is activity on the bonds they want to buy or sell.

Instead of looking at multiple screens, Switzer said the firm is utilizing ALFA to aggregate information from electronic trading platforms, whether it be MarketAxess, Tradeweb, Liquidnet among others, or utilities such as Symphony and Project Neptune.

Demand for more fixed income data and analytics is a reflection of the evolving market structure, and how the buy side is adapting to technology.

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