Banking

MarketAxess and Tradeweb are disrupting how bonds are traded, and it’s forcing banks to upgrade their tech

  • Banks’ trading desks are processing more corporate bond transactions electronically.
  • Tradeweb and MarketAxess have logged record numbers in trading levels and revenue in the last year.
  • The growth of third-party trading firms are pushing banks to up their own tech capabilities.
  • See more stories on Insider’s business page.

Whether it’s credit traders flipping securities in the secondary market or syndicate desks compiling orders for new bond deals, sales and trading teams are opting for digital programs instead of the telephone.

Electronic trading venues like Tradeweb or MarketAxess are integral tools for bankers. The tech instantly connects fast-moving trading desks with clients while enabling them to absorb pricing data from market peers.

But that same innovation has empowered the buy-side to execute trades without the dealers, effectively cutting them out of a market they have long dominated.

And high-speed traders have also been able to push into the space thanks to the electronic venues, creating more competition for banks and forcing them to rethink their tech strategy.

“Non-bank

liquidity
providers’ presence has encouraged traditional dealers [banks] to up their tech games,” said Kevin McPartland, head of research at Greenwich Associates’ market structure and tech group.

The two sides — banks and trading venues — maintain a complex relationship in bond trading. Some, including JPMorgan in a recent report, view MarketAxess and Tradeweb as competitors to dealers. 

But others said the venues are merely part of the electronic evolution of the market structure. 

“I wouldn’t refer to them as direct competitors. They’re part of the toll road of electronic transactions and fixed-income products,” said a senior banker. “Every stop along that toll road is meaningful to the pricing that goes to the end client.”

Bond trading venues are changing the market landscape

Banks are deeply intertwined with third-party players.

Tradeweb’s board of directors includes executives from Goldman Sachs and JPMorgan. Lee Olesky, Tradeweb’s CEO formed the idea for the company while he worked at Credit Suisse First Boston. MarketAxess was also founded by former JPMorgan banker Richard McVey.

“When third-party platforms put out new features, there’s almost always a bank involved to build out that functionality,” McPartland told Insider.

Key, however, is whether these venues jeopardize banks’ client relationships.

In broadening the ecosystem of credit trading, banks are somewhat exposed. Hedge funds, asset managers, and market makers can quote both bid and ask prices for a company’s bond, cutting out bank dealers entirely. They’re effectively eating into traders’ lunch, a second senior banker said, and it’s a trend that’s growing.

About 38% of asset managers and hedge funds that participated in a Greenwich survey published last quarter said they’d provided liquidity, while 25% said they’d be able to or were planning to in the next year.

But banks are reshaping their businesses to trade profitably via electronic means, without sacrificing client relationships, McPartland said. They’re also pivotal in high-yield and emerging-markets bond trading where the buyside is smaller and more trading is done bilaterally.

Importantly, it remains a lucrative business for big banks. JPMorgan’s fixed-income markets revenue grew 15% to $5.8 billion at the end of the first quarter, while Goldman Sachs’ fixed-income revenue grew 31% to $3.9 billion.

Trading fees play a factor in banks’ concerns

That’s not to say that bankers aren’t concerned about the costs from third-party players.

Roughly 35 – 40% of investment-grade bond trading is done electronically, and that’s expected to increase as bankers rely on tech to thrive in a hybrid workplace, according to Greenwich data.

As the percentage of electronic trading rises, that’s a cost that could eat into client returns, and it didn’t exist prior to the emergence of third-party platforms, according to the first banker that requested anonymity.

JPMorgan analysts, led by Kian Abouhossein, suggested in the report that banks could deploy their own cash to develop electronic-trading capabilities.

The likes of Goldman Sachs, Bank of America, and Citi have worked with clients to facilitate direct electronic trading, effectively cutting out third-party trading venues, Insider reported in May 2019.

But most traders said the efficiency of digital offerings, coupled with the breadth of investor connectivity and strong data, outweigh the costs involved, especially as investment banks log soaring revenues in sales and trading.

The first banker described third-party trading aids as a “service that’s needed,” and a leap from communications via Bloomberg’s messenger service.

Leaner sales and trading desks are utilizing tech aids like Tradeweb to handle heftier transaction volumes. And partnerships with these firms are necessitating investment from Wall Street.

“A lot of [banks’] money in the past might’ve been spent on rainmaker sales people, but some of that cash is now redirected to tech innovation or data scientists” said McPartland. “It’s an important part of the franchise.”

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