Increased electronic and automated trading in fixed income securities is changing the market landscape, but liquidity may become more fragile during periods of market stress, the Bank for International Settlements said in a report published on January 21.
The report said increased oversight and capital costs are changing the behaviour of traditional participants but warned the benefits of electronic trading are not uniform for all debt segments, with potentially negative effects for less liquid securities.
Dealer-to-client (D2C) trading of corporate bonds has traditionally been request-for-quote, where investors ask multiple dealers for prices via the dominant venues Bloomberg, Tradeweb, MarketAxess and Bondvision.
BIS said that liquidity providers from outside the banking system are now attempting to trade directly with end-investors using electronic connections while trading platforms are trying to utilise novel protocols.
"One innovation has been electronic all-to-all trading platforms; market participants estimate that around 5% of electronically traded investment grade and high-yield bond trades are conducted on all-to-all platforms," the report said.
Under pressure from the increased competition, some long-established platforms have expanded access to a wider range of participants, reducing the conventional distinction between dealer-to-dealer and D2C segments.
Buyside investors have reacted by developing infrastructure to respond to trade enquiries but BIS points out that they face challenges in proving best execution for regulatory purposes.