Innovation in Focus: Electronic Trading Platforms in US Corporate Bonds

Electronic Order Books Herald a New Market Structure
by David Easthope, March 21, 2013
Industry Trends
North America

Abstract

With all evidence pointing to smaller trade sizes in US corporates, institutional traders are looking to complement their workflow and liquidity search with electronic order books (EOBs). The EOBs have tended to focus on the retail market, but they are highly advanced and likely to see increased adoption by the institutional buy side, which has to look elsewhere as dealers cut back on inventory holding.

In Innovation In Focus: Electronic Trading Platforms in US Corporate Bonds: Electronic Order Books Herald A New Market Structure, Celent dissects the innovation occurring in the US corporate bond electronic trading and associated vendor ecosystem. While there is a bit of “me too” occurring in the market for electronic trading as well, particularly among dealers, there are also some exciting new platforms in the multidealer and ATS molds with unique value propositions.

While there is immediate potential for uptake at new EOBs as they complement buy side trader workflow, not all will survive. Some will remain highly focused on one segment of the market, while others will focus on a distinct set of clients. Even among the EOBs, the market is far from homogenous. The institutional and retail markets will increasingly intersect as trade sizes fall, and we believe traders will direct an increasingly larger flow of liquidity to the EOBs.

“With more education of the available options and specialized vendors providing connectivity, aggregation, and smart order routing, adoption will accelerate,” says David Easthope, Research Director with Celent’s Securities & Investments Group and author of the report. “Whether the EOBs move from complementary to the de facto market will depend ultimately on whether a best execution culture for US corporates arrives on the buy side, and whether the regulators decide to put pressure in this direction.”

This 18-page report contains one figure and three tables.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

Celent Securities & Investments: Innovation in Focus

2

Introduction

3

The Innovation Cycle in Fixed Income

4

 

A Glacial Shift: Innovation in the Market

4

 

Market Segmentation of Electronic Platforms

5

Drivers of US Corporate Bond Markets

7

 

Profitability Drivers

7

 

Liquidity Drivers

7

 

Trading Drivers

8

Electronic Platforms: What Is All the Fuss About?

10

 

Selected EOBs

10

 

Selected All-to-All Platforms

13

Selected Enablers of Electronic Order Books

15

 

Greater Specialization in Fixed Income

15

 

Areas to Shine

15

Conclusions

17

Leveraging Celent’s Expertise

18

 

Support for Financial Institutions

18

 

Support for Vendors

18

Related Celent Research

19

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