The same technological forces that reduced costs and increased liquidity in the equities market are destined to disrupt the corporate bond market. The human user experience is key to marrying liquidity and trading styles — from login through to execution, it should be a smooth and intuitive process. It’s time to listen to how the market trades rather than telling the market how to trade.
The hunt for yield requires targets that will provide a suitable risk-adjusted return relative to Treasuries. Crucially, more and more of those targets are found in the segment of the market which does not trade frequently today. When those assets do trade, they are frequently arranged over the phone, in bilateral chat messages, or rarely on platforms that share orders widely with the market. Why isn’t there a way for traders to efficiently share, find, and execute orders in less liquid assets? Why has the corporate bond market been slower in modernising in comparison to other asset classes?
Building liquidity in a market is not easy. While a company may issue only one stock, it can issue a dozen of unique bonds. There are 43,000 stocks in the world, but there are millions of bonds, each with its own legal and financial complexities.
A more human path to trading
Trading platforms have spent the last 20 years building digital capabilities. At most they have digitized a process, now it’s about taking it to the next level, applying the psychology of trading to enrich the interaction, giving a greater depth of analysis to aid the decision-making process and ensure both parties to the trade come away feeling positive.
Meanwhile, the balkanization of different platforms and workflows has increased the operational cost of trading.
The current solution is to ask traders to bridge the gaps in liquidity pools, deal with the complexity of all types of orders, execute to a target price inside a time window… and prove best execution. More human intervention seems to be the answer, but the tools are only addressing part of the problem.
Traders today are asked to use all of the tools at their disposal to deal with ever-growing challenges. The fragmentation of data and tools to form a price, identify the liquidity available to you and then execute means a merry dance around a number of different software providers often juggling two at the same time.
It’s time for some consolidation, confidence in knowing that in one place you have the right tools to make your decision in a logical and effortless way. The journey from pre-trade analysis and price formation to counterparty analyses and execution via any protocol should be as easy as A, B, C. Whilst simultaneously ticking all the boxes for maintaining relationships, best execution and seamless interaction with internal systems.
Currently, the electronic platforms which brought about the partial electronification of corporate bond trading are app-based. This means that they work on only one part of the problem — they solve for one workflow challenge or one style of trade.
Shouldn’t the tools available to traders, work for them, not the other way around?
Start with the user. It’s a simple approach that creates major breakthroughs. User-centric design is a concept long-adopted by the very best technology companies. Product design comes from an empathetic understanding of what the user is really trying to achieve, and then reimagining how they could most efficiently and effectively achieve that outcome.
Understanding the small nuances that are required in the credit markets are critical to a trade consummation — or not. Simple items such as quoting in price or spread, capturing benchmark quotes, negotiating disclosed/bilaterally or anonymously, control in publishing. An added benefit is understanding the desk set-up from a risk perspective: whether segregated or integrated, multi asset or single asset, acting for others or purely in house. Small nuances that aren’t catered for can block liquidity being posted and limit trading opportunities and experience.
Taking all of these factors into account allows new functionality to be seamlessly delivered, critically in short cycles to keep up with the fast-changing environment and differing workflows. That is in sharp contrast with current providers who can take up to 2 years, in some cases, to release new functionality.
If the corporate bond market is to take the next step in its technological evolution, this can only be achieved by listening to how the market trades rather than telling the market how to trade. This transformation requires a bottom-up, not a top-down approach.
At LedgerEdge, our technology allows us to listen, evolve and refine the human experience to ensure the end-user always wins.