No solution in sight for fixed income liquidity problems
Buy-side firms have reported liquidity-related problems executing when fixed income trades, leading to buy-side firms taking more control. In the US, 68% of market participants believe that liquidity now sites with the buy-side and the challenge is moving the securities. According to The Trade, buy-side firms are disappointed with offerings from Liquidnet and Nepture stating while they make the process more efficient they do not provide much needed liquidity. Further, buy-side fixed income traders warn that MiFID II pre-trade transparency rules will result in leakage and harm liquidity.

News of fixed income traders being unable to execute bond quotes on Bloomberg’s trading platform saw a storm of interest among Trade readers earlier this month.

In the days following the story’s publication, I received countless emails and phone calls from buy-siders, who explained to me that this is a serious issue which needs to be raised with regulators ahead of the introduction of MiFID II’s pre-trade transparency rules.

The ultimate problem in fixed income, according to those I spoke with, is sourcing liquidity. Countless initiatives claim to be able to solve this problem.

The market is evolving, but not in the same way as equities. It is a direct result of investment banks being unable to hold the inventory they used to. This has led to the buy-side “taking control” of liquidity.

In the US, 68% of fixed income market participants agreed that liquidity is now in the hands of the buy-side, and the challenge is actually moving the liquidity from buy-side books, rather than sourcing it.

It was surprising to hear that buy-siders are less impressed with Liquidnet and Neptune’s offerings in this space than I initially thought. Buy-siders explained these initiatives simply make the trade process more efficient, but do not provide the much needed liquidity.

So I asked, what’s the solution?

The answer was again an unexpected one - there is no solution.

The only way to “fix” fixed income is for the regulators, who seem to have applied equity logic to the new fixed income rules, to change their minds and review the fast approaching rules.

The Trade held several MiFID II events across Europe this month and one particular speaker, Elina Yrgard, senior legal counsel for European affairs at Nasdaq, detailed the discussions she has held with ESMA on MiFID II.

She explained it was highly unlikely ESMA would delay implementation of MiFID II further, or revise the rules. ESMA are keen to get something in place as soon as possible.

The buy-side is anxious about raising the issue with regulators, again something I found very surprising. Despite many telling me it needs to be voiced and something needs to be done.

So where does that leave fixed income traders?

A director of an investment management firm told me if the rules apply, we could see the ‘death of the bond market’, as unintended consequences are expected to sweep the market.

I can almost see it coming - Fixed income, currencies and commodities revenues in the first quarter this year have plummeted 49% since 2011, amid the slowest start to the year since the financial crisis, according to research.

MiFID II pre-trade transparency rules are now to be phased in, beginning 3 January 2018.

By Hayley McDowell

hayley.mcdowell@information-partners.com