Covid-19 forces electronic shift in bond markets

This article originally appeared in the Financial Times here.

One of Wall Street’s quintessential images is fading in the coronavirus era, as electronic dealing sweeps away scenes of brash bond traders barking orders.

As volatility surged last year, so did the percentage of corporate bond trades executed electronically. While consumers switched to online shopping and office meetings moved to Zoom, stuck-at-home traders turned to electronic platforms as a way to continue buying and selling bonds in pandemic-shaken markets. 

By December, one in every three transactions was taking place on an electronic platform, according to data from Greenwich Associates. This momentum continued last month, with volumes of digital trading in investment-grade and high-yield bonds rising 3 per cent and 7 per cent year-on-year, respectively. Analysts and traders expect this shift to continue.

“While people will find their way back to offices over time, the new tools and technology they have adopted are here to stay,” said Kevin McPartland, head of market structure and technology research at Greenwich Associates. Electronic trading was on the rise before the pandemic, he added, but “the move to trading from home certainly accelerated things.” 

The corporate bond market has been a slow adopter of technology compared with currency or stock markets, which are now mostly transacted electronically. A typical public company will have a single equity security but might have multiple types of bonds, with each individual debt instrument trading far less frequently. This makes standardising trading harder.

That had started to change before the pandemic struck. Electronic trading made inroads with the growth of platforms like MarketAxess and Tradeweb — where investors can electronically request prices for bonds from certain dealers, or trade anonymously with the wider market at prices streamed on to the platforms. 

This shift was encouraged by the growing use in bond markets of exchange traded funds: stock-like instruments with intraday pricing that track an underlying index. ETF providers trading in and out of bonds to keep an instrument tied to its index drove advances in electronic trading.

But over the past year, electronic dealing became the go-to method for many types of investors. 

“We think work from home was a very strong catalyst,” said Chris Bruner, head of US institutional fixed income at Tradeweb. “It’s as much about the mindset toward innovation as the technology itself. Over the past year, people have been open to looking at new tools and seeing what works in a new environment.”

As coronavirus sparked volatility in the markets almost a year ago, the desire to trade bonds also rose, as traders sought to reposition for the new risks stemming from the pandemic. Every avenue, including electronic trading, became crucial to source much-needed liquidity. 

Investors also needed more frequent data on bonds that, in normal times, might have barely budged day to day. They wanted the most up-to-date price information, while bankers said they also needed faster data to manage their risk limits. 

This was then further compounded by a shift to working from home, as information gleaned from chats on trading floors was replaced by electronic communication. 

“I think it comes down to the infrastructure we have at home, compared to what we have in the office,” said Lynn Martin, president of fixed income and data services at ICE. “It’s forced us all to think differently”

After the volatility came a borrowing spree: companies raising hundreds of billions of dollars through the bond market to outlast the pandemic, spurring demand from investors to keep trading. Bankers said the increased ease and efficiency of trading allowed them to respond to trading demands for the rest of the year, driving volumes higher. 

Both MarketAxess and Tradeweb enjoyed record volumes across US credit in 2020. The platforms’ stock prices are up 50 per cent and close to 40 per cent, respectively, over the past year. 

Beyond simply executing a trade, electronic systems are being used to source data and bond prices, communicate with dealers, track positions and analyse a trade after it is done. 

“This was top of mind last year, before the pandemic, but now it’s reaching fever pitch,” said Sonali Theisen, head of fixed income e-trading and market structure at Bank of America. “That whole ecosystem has become the focus of how to run a trading business efficiently.”

The regime shift is affecting even the most staid corners of the market. Bank of America saw a 67 per cent increase in the amount of high-yield bonds it traded electronically between 2019 and 2020. The market has traditionally operated over the phone, because of bonds’ lower trading frequency and their weaker credit quality, which makes them harder to price. Both MarketAxess and Tradeweb set record average daily trading volumes for high-yield bonds in January.

“There is a tonne more work to do and there is a long growth trajectory ahead of us,” said Rick McVey, chief executive of MarketAxess. “We have now entered the mainstream.”