After conquering stocks, electronic market makers are finally gaining ground in fixed income.
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Citadel Securities says the number of institutional clients using its fixed-income services has jumped more than 15% since it started making markets in investment grade corporate bonds last year. Already one of the top dealers for Treasuries, the sibling to Ken Griffin’s hedge fund will soon launch into European and UK government debt. It also plans to begin portfolio trading — a red-hot technique for moving big baskets of securities in one swoop — before entering high-yield credit.
Jane Street estimates in its debt document that the percentage of investment-grade bonds traded electronically in the US jumped to 42% in 2023 from 34% two years earlier. In high-yield debt it was 31%, up from 25%. Coalition Greenwich says 64% of US Treasury trades were handled electronically in 2023, up from 45% before the pandemic struck.
The same tools also help them “internalize” more activity — fill orders from their own inventory — which can reduce a transaction’s discernible impact on the market. That’s a big draw to asset managers who want to offload or establish positions without creating a stir. That chimes with what other asset managers say. Legal & General Investment Management Ltd. sees alternative liquidity providers becoming increasingly relevant for risk-transfer activities. Swiss money manager Syz Group said it’s routing double the amount of fixed-income trades through alternative liquidity providers compared to three years ago.
Virtu, another well-established ETF market maker, is also in the top 10 for investment-grade trades at MarketAxess. Having launched its corporate credit operation in 2022, it now executes more than 1,000 trades a day on the major electronic platforms. Year-to-date activity is currently about double a year ago, the firm said.
For many transactions, tech-powered challengers still depend on banks for help with services such as custody, clearing and settlement. That means new players are often among the top clients of a bank’s prime brokerage, even as they cause pain for its trading desk. But the exact drivers of these patterns are not certain, and the debate is far from clear cut. As a general principle, more liquidity providers in the market should be a net positive, and some firms point out that when bid-ask spreads widen at times of stress, non-banks actually have more flexibility to deploy their balance sheets than their heavily regulated counterparts.
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