Rebecca Healey, Liquidnet’s Head of Market Structure & Strategy in EMEA, investigates how the introduction of new European regulations will impact trading in corporate bond markets in the third post of a 5-part research paper.
The opportunity cost of corporate bond trading often remains a secondary consideration given the lack of price transparency and limited liquidity. The selection of execution brokers remains tied to the provision of investment ideas. However, as a result of unbundling, corporate bond trading is on the brink of a new evolution in execution performance and liquidity provision.
January 3rd 2018 represented the start date of a new era of regulation which will significantly alter traditional sell- and buy-side relationships. As the baton of execution passes from the sell to the buy side, the need for greater accountability and transparency will change what the sell side can provide, as well as what asset managers will require, and from whom. As the provision of risk capital becomes more selective, alternative methods of sourcing liquidity will need to be found.
A new level of investment in both technology and up-skilling of trading personnel is required to take advantage of this opportunity, altering the role the buy-side trader plays in the implementation of investment strategies.
To comply successfully, firms not only need to embrace technological change but behavioural change across their organisations to deliver enhanced performance to end investors. In the current competitive asset management industry, those firms who choose to make this investment will have a head start against their peers, but the cost of implementation is high and not all firms have the capability, nor the will to deliver all that is required, leading to greater use of outsourcing of vendor technology and new service offerings.
- As execution selection is decoupled from the provision of research, buy-side requirements from the sell side are evolving; just 30% cite the provision of broker capital as a top three requirement in selecting execution counterparts.
- The Instead it is an amalgamation of services putting the buy-side trader at the centre in the search for liquidity with 90% of respondents looking to record the steps they take in the search for liquidity, just under half of whom plan to do so throughout the trade lifecycle.
- This will require a significant level of investment in both IT and personnel when two-thirds of respondents are banking on order management systems (OMS) to deliver, yet OMS functionality continues to frustrate with nearly one third still waiting on MiFID II rollouts.
- Technology offerings need to evolve, both in terms of functionality but also at a more realistic price point. The current dearth of valuable data for certain instruments means nearly half of those who plan to use TCA remain unconvinced as to its value.
This is leading to a focus on platform technology with 83% of respondents citing one or more technology initiatives they are looking to potentially incorporate in their workflows.