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MarketAxess CEO: Traders 'leaning on' electronic trading platforms to move bonds

? The corporate bond market's long-awaited transition to electronic trading platforms would be a "significant step forward" to improving liquidity.

? Tighter regulation, such as Europe's Markets in Financial Instruments Directive II, or MiFID II, could drive more fixed-income traders to electronic trading platforms.

? Some bond traders on electronic platforms conduct 8x more trades per day than traditional traders, according to MarketAxess' chief executive.

Corporate bond trading is beginning to be transformed by the rise of electronic trading platforms from companies such as MarketAxess Holdings Inc.

For nearly two decades, these companies have battled broader market forces to make electronic trading more common in a space long dominated by phone calls and chat messages. Now, with traders increasingly looking to electronic trading platforms as liquidity sources, MarketAxess expects electronic platforms to play an increasingly important role in fixed-income trading.

MarketAxess Chairman and CEO Rick McVey spoke with S&P Global Market Intelligence about the corporate bond market's shifting landscape and his company's outlook.

The following is a transcript of that conversation edited for length and clarity.

SNL Image
Rick McVey, chairman and CEO of MarketAxess Holdings
Source: MarketAxess

S&P Global Market Intelligence: Electronic trading accounted for about 20% of all trading in the corporate bond market in 2017, according to Greenwich Associates. How has corporate bond trading changed in recent years? What is the draw to trading through an electronic trading platform?

Rick McVey: Trading in corporate bonds is quickly moving to a more efficient and liquid model.

The growth in electronic trading, the advancements in market transparency and the large investments that both dealers and asset managers have made in technology solutions have all contributed to the market moving toward a better place. Anecdotally, we hear that traders who are primarily operating in electronic markets can conduct approximately 8x more trades a day than those still dealing in high-touch, phone-based models.

When you think longer term about market liquidity, a global electronic network that has 1,400 institutional firms trading each day — to me, [that] creates a much better foundation for market liquidity, especially when market volatility picks up. Investors and dealers are really leaning on electronic marketplaces to move bonds in a bigger way than ever before.

What does the future of electronic corporate bond trading look like in 2018 and beyond?

McVey: We remain optimistic on the future growth of electronic trading in fixed-income markets. The primary reasons for that are an increased focus by institutional asset managers on reducing their costs, the improvement in transaction costs that we are able to deliver and finally, the increased regulatory focus on best execution.

The corporate bond market's illiquidity has been sourced to everything from post-financial crisis reforms like the Volcker Rule to higher corporate bond issuances, which totaled more than $900 billion in 2017. Why is liquidity so scarce in these markets? What can be done to fix it?

McVey: Global fixed-income markets are highly fragmented. You do have some areas where bond trading is extremely liquid, primarily in developed government bond markets. But when you get into credit, you're dealing with hundreds of thousands of unique issues.

Technology is helping to solve the challenges that fragmentation in credit markets creates. Dealers and investors are embracing central marketplaces like MarketAxess to conduct more of their trading where trade opportunities are made available more openly.

This is a significant step forward as to what used to take place with a lot of phone conversations in trying to connect a highly fragmented market to now move toward a global, central marketplace where anyone can trade with anyone else.

Fixed-income trading has started to open up with platforms like MarketAxess introducing introduction "all-to-all trading." In 2017, MarketAxess recorded a 54% jump in this type of transaction from 2016. What exactly is all-to-all trading, and do you expect this trading method to keep growing?

McVey: We do. Early signs [in 2018] are that it is doing just that. It's a tool for liquidity for both investors and dealers. Investors have more market participants that are able to compete for their orders and be on the other side of a trade. It [also] gives dealers another tool to seek liquidity themselves, and run their trading business with less balance-sheet commitment.

This new all-to-all marketplace is really opening up trading opportunities for investors and dealers. The platform has really evolved from purely client-to-dealer to client-to-client, dealer-to-dealer and even, dealer-to-client trading.

That's the true nature of what we are trying to build: an all-to-all marketplace that would increase trading opportunities and reduce transaction costs for everyone.

You serve on the SEC's recently launched Fixed-Income Market Structure Advisory Committee, a group of industry experts who meet with regulators to discuss some of the markets' most pressing issues. What do you expect the SEC to focus on through the committee's work?

McVey: There are three or four things that [have arisen] in the early conversations. There was a lot of discussion about market liquidity, transparency, issues related to retail fixed-income investors and electronic-trading developments. Those are some of the areas I think the [committee] will be focused on in the quarters ahead.

With Wall Street's top regulator now taking a finer look at the space and European officials cracking down with MiFID II, how will regulators' presence in global fixed-income markets impact the migration toward electronic trading?

McVey: It's interesting to see the differences that certain regions are taking, as we start 2018 with a significant increase in market regulation in Europe, while at the same time, the regulatory trend has had a lighter touch in the U.S.

One of the key components of MiFID II for European investors is the requirement to demonstrate best execution through analytical means for both equity and fixed-income trades. Most clients believe it is easiest to demonstrate best execution for orders that have been made available on broad electronic marketplaces. Any increase in focus by regulators on best execution tends to increase adoption for electronic trading.

The U.S. regulatory focus is currently focused on collaborating with the industry to find areas where the regulators can help improve market efficiency, soundness and fairness.