In the complex world of financial markets, one area that has long remained somewhat opaque is the trading of US corporate bonds. However, a significant development is underway as some of Wall Street's largest banks are joining forces with BlackRock Inc.'s Aladdin technology system. This move aims to provide real-time pricing data, bringing much-needed transparency to this crucial market segment.
Enhancing Market Transparency
It is a step in the right direction towards a more transparent market. Historically, hyper-competitive banks have hoarded pricing information, but now, through this partnership, data will be contributed to Aladdin via BondCliQ Inc. This system describes itself as the creator and operator of the first and only consolidated quote system for US corporate bonds.Dealers such as Bank of America Corp., Morgan Stanley, and JPMorgan Chase & Co. are among those participating. While representatives for the banks have not yet responded to requests for comment, this collaboration holds great promise.Users of Aladdin's platform will gain direct access to licensed and attributed quotes from more than three dozen dealers. The data includes price quotes for both investment-grade and junk-rated US debt. As Bloomberg LP, the owner of Bloomberg News, also provides pricing data for corporate bonds, this comprehensive offering will offer equal access to information.Chris White, the founder of BondCliQ, emphasizes the significance of this partnership. "This partnership presents pricing data uniformly to all buy-side clients, just like the US equity market. According to history, the adoption of centralized pricing data will lead to improved secondary market liquidity and greater market integrity for both retail and institutional investors."Overcoming Market Laggardship
The corporate bond market has long been regarded as a laggard in modernization. While the vast majority of the equity and currency markets moved to electronic exchanges decades ago, the bond market has been slower to adopt these changes. Anachronistic bond trading has attracted the attention of regulators, who have recommended "tighter reporting and public dissemination requirements for bonds" in the aftermath of market volatility in March 2020.However, a hurdle to more transparency has been the dealers themselves. They earn money from arranging trades on behalf of clients. But as fixed-income trading volumes boom, this attitude is beginning to change."For dealers, contributing to BondCliQ will attract order flow, and for buy-side institutions, leveraging BondCliQ pricing within Aladdin will improve their workflow and dealer selection process when block trading," says White. He has prior experience in spearheading previous electronic trading projects in credit at Goldman Sachs Group Inc. and Barclays Capital.Increasing Trading Volume
US trading volume for high-grade notes rose nearly 20% in the first half of the year, and 13% for junk. A jump in portfolio trading has contributed to this increase. Portfolio trading allows investors to buy and sell large lots of different bonds at once.Barclays strategists, including Zornitsa Todorova, wrote last week in a separate report that US portfolio trading is booming, with a new trade every seven minutes. This is 10 times faster than in 2018.More electronic trading has also played a role in boosting volume. Research firm Coalition Greenwich stated that about 40% of corporate bond trades are now online, up from less than a tenth a decade earlier.Larry Tabb, the head of market structure research at Bloomberg Intelligence, believes that increased transparency will make the market more electronic and more efficient. "We've seen that in the equities world, the FX world, and in some asset classes that are more transparent and liquid. And this is starting to happen in the corporate bond market."
