“I’ve learned there are 3 things never to discuss with people: religion, politics, and the Great Pumpkin.” – Linus, in It's The Great Pumpkin, Charlie Brown
It’s no secret that the vast majority of equity trading takes place electronically these days, and some investors might assume that it’s the same case in the bond market. The truth however is quite different; according to some estimates, barely 25% of corporate bond trades were executed electronically in 2018. Credit traders have been hesitant – to put it nicely – to adopt the same technology that has significantly decreased the size of equity trading desks, preferring instead to clinch deals over the phone or chat systems. After all, illiquidity and large bid/ask spreads are the main reasons brokers’ bond trading desks can still be profitable. Not to mention traders’ fears of bots taking their jobs. Thus, the topic of bond market electronification has become taboo in bond trading circles, particularly on the sell side.
To be clear, there are admittedly some good reasons why electronic trading hasn’t taken over the corporate bond market – differences in coupons and maturities, special features and less liquidity have combined to make credit an unideal segment for bots to trade. But change is inevitable and buy-side firms seeking to ensure they get best execution have taken charge. Money managers are gathering live data on their portfolios to work out the best ways to trade, including bid and offer prices from dealers and electronic trading venues. And recently, one buy side manager said that its bond-trading program completed the first bot-to-bot trade with a sell-side dealer. Undoubtedly, those who don’t adapt to the electronification of bond markets and the application of AI to bond trading will be left in the dust.
We agree with Linus that certain things shouldn’t be discussed in polite company, but ignoring a problem won’t make it go away. It will be some time before bots completely replace traders; for now, we welcome a system that could reduce human error and find better prices for us and our clients.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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