High-Yield and Emerging Markets Product Manger
April 23, 2015
Fixed income institutional investors continue to search for yield in the continued low rate environment, and recent regulatory requirements restrict market-making capabilities for bank-owned dealers. The challenge for high yield market participants is to source enough bonds to meet the liquidity demands of growing portfolios.
Electronic trading is one way in which investors, dealers and ETF market makers are finding liquidity in these markets. According to a Greenwich Associates survey published in September 2014, approximately 6% of the overall HY market in the U.S. as measured by FINRA’s TRACE is traded electronically, and about 95% of that electronic volume takes place on MarketAxess.
Traditional Sources of High Yield Liquidity
The MarketAxess trading system has traditionally operated on a client-to-multi-dealer request-for-quote (RFQ) model, where an institutional investor submits a bid/offer wanted to multiple dealers simultaneously. The selected dealers see the inquiry from the client and provide responses; the best level wins the trade. For over a decade, this disclosed RFQ model has proven to be efficient and cost effective.
The growth of our estimated HY market share of TRACE reflects an increasing adoption of e-trading in the high yield markets (see Figure 1). Our established presence in HY electronic trading is now paving the way for our technology to be a viable solution for today’s liquidity challenges.
Figure 1: At the end of 2014, MarketAxess HY market share of TRACE reached 6.2%, up from 5.2% in 2013. Source: MarketAxess, FINRA
New High Yield Liquidity Providers through Open Trading
Open Trading succeeds on the premise that access to a broad network of trading counterparties increases the likelihood of finding a natural trade match and connecting opportunistic buyers and sellers. For the high-yield market, this network of participants includes traditional asset managers, major, regional and boutique broker-dealers, hedge funds, and ETF market makers.
Open Trading leverages our proven RFQ workflow but now allows both buy and sell side participants to anonymously initiate and complete trades with each other. Anonymity helps protect against information leakage, and is a complement to the existing disclosed trading business.
Growth in HY Trading via Open Trading
Open Trading on MarketAxess is proving to be a meaningful source of high yield liquidity (see Figure 2 and Figure 3). On average investors can save over $3,400 per million traded in high yield through Open Trading.
Figure 2: As of March 2015, Open Trading represented approximately 14% by count of all HY trading activity on MarketAxess. Source: MarketAxess
Figure 3: As of March 2015, high yield represents approximately 26% by count of all Open Trading activity. Source: MarketAxess
Within the past two years, MarketAxess Open Trading has grown to be a significant portion of trading activity, both by volume and by tickets (see Figure 4 and Figure 5).
Figure 4: As of March 2015, HY ADV totaled over $51 million, up 255% from a year ago. Source: MarketAxess
Figure 5: High yield trading has grown with an over 310% increase in trade tickets in the first quarter of 2015 compared to a year ago. Source: MarketAxess
A Liquidity Pool for the Future
When rates rise and demand shifts, we believe that investors and dealers can keep turning to MarketAxess Open Trading as a continued source of liquidity. While anonymous all-to-all trading is still only a fraction of the overall market, our trade data and anecdotal evidence proves the appetite is strong for innovative solutions to today’s liquidity challenges.
Read more from Richard Schiffman, Open Trading Product Manager.