Illiquidity inhibits platform design for corporate bond trading
Market illiquidity is an obstacle to developing a stable trading platform for corporate bonds, according to the International Organisation of Securities Commissions. Finding a suitable design has also been elusive, as the equities trading templates that have so far been tested haven't proven directly transferable. Trading platforms for the debt "require further evolution in order to gain transactional market share,” the organisation said. 

Corporate bond market illiquidity and the suitability of platform design are key challenges in institutional fixed-income trading, said the International Organization of Securities Commissions.

In a research report on financial technology published Wednesday, IOSCO identified a number of trends associated with the emergence of bond trading platforms accessible to institutional investors.

IOSCO’s research found that platforms are enhancing trading protocols and introducing new protocols to increase market participation, identify liquid opportunities and enhance price discovery and transparency. The organization also found that platforms are increasingly targeting larger sized trades, which are sought after by institutional investors.

But the recent proliferation of electronic trading platforms has created new challenges for buy-side participants in the corporate bond space, such as the use of equity trading platform design as a template, IOSOC said.

“The proposed platform solutions, many of which originated in the equity market, may not yet be fully transferable and still require further evolution in order to gain transactional market share,” the organization said in the research.

“Many entrants provide technology solutions from other markets repurposed for corporate debt, and need to adjust to the nuances of the market. It is often difficult to re-engineer consistently the buy-side relationship experience in trade initiation and negotiation, liquidity delivery, price discovery and firm price quote features — all the while protecting buy-side client anonymity — on new technology platforms.”

Another issue pointed out by IOSCO was the inaccurate picture of bond market liquidity. “Along a unique order custody chain, difficulties in parsing prices marketed simultaneously on multiple platforms have emerged, creating the appearance of duplicate orders and misrepresented market liquidity.”