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What is next for corporate bond trading?

There have been significant shifts in the corporate bond market over the years, with plenty more on the horizon too. But where does the market stand today? And how can traders and investors prepare themselves for future challenges?

By Brian Hickey, Head of Product

Pushing evolution in markets

The corporate bond market isn’t immune to change. From the introduction of Request for Quote (RFQ) to the financial crisis – the industry has had to evolve. Set against the steady simmer of volatility this year and the current backdrop of macroeconomic factors – including higher rates and inflation shifts – traders and investors still have plenty to navigate.

Another profound change is that the volume of information linked to bonds has grown. There is now a pressing need for new and improved ways to manage bonds, whilst uncovering new liquidity opportunities.

The way participants approach markets has changed over the years and priorities are increasingly focused on: pre-trade analytics (to make better informed decisions); more efficient workflows (as trading becomes more electronic); and improving liquidity (such as the buy-side being a more proactive price maker, and the sell-side evolving their price and axe distribution).

Connectivity and nuanced workflow

The thread that combines these priorities together is data. Markets need better data, or a set of controls around data, to drive greater efficiency – and this has pushed innovation. As a result, there have been great strides made in:

Automation: With some trades able to be managed entirely electronically, if traders decide that prices look accurate, they can process a much higher volume of bonds.

Data utilization: Helping to streamline workflows, speed up execution processes, and free up time for traders to focus on more difficult trades and be creative in making markets.

“All to all” markets: The impact of innovative technology and robust data has meant that new players have entered the market – providing much greater opportunities for both buyers and sellers to increase their trading opportunities.

Better execution: Data is the building block behind the evolution of the market, enabling traders to use it as a tool to boost their offerings. There is so much potential in new protocols – in everything from negotiation and portfolio trading to powerful search tools and smart orders. Whilst corporate bonds have always been a market where portfolio managers and traders work together, technology has cemented this relationship further by creating greater efficiencies and portfolio optimization.

For the markets to continue to move towards something that’s more digital, it requires better connectivity so that users can engage point-to-point with others, at the speed and performance levels that they want. With flexible workflows, the right data is protected and shared with the right users. Everyone wants firmer prices and less slippage; so clients can trade liquid credit bonds quickly, in a very efficient manner, giving them the opportunity to focus on adding value across the investment process and source new liquidity. Systems of the future must build in flexible workflows to allow that to happen.

Tackling challenges on the horizon

There are plenty of challenges on the horizon – from scarcity in bonds, to central bank policy changes and interest rate hikes. As a result, many traders and investors are turning to technology to future proof their portfolios, find contra liquidity and expand the addressable market.

Market participants are embracing new approaches. Distributed ledger technology (DLT) and institutional grade controls can deliver differentiated value across the investment process. Traders own and control all their data, enabling intent to be safely shared without compromising sensitive information.

Operating in a centralized and regulated financial system, users confidently share data – allowing them to move further back into the investment process, bring in entire portfolios and assist with portfolio construction. A key benefit of a DLT system is so much of what is traded electronically in the market today (a less liquid half) could be done more efficiently, with a nuanced and controlled approach.

As more users operate within an efficient and transparent environment, volumes traded electronically will increase and it will be linked to better data. Not only does this improve workflows, but critically it expands the addressable market. With continued volatility on the horizon, traders need to future proof activity to both survive and thrive in this challenging trading environment.

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