Trading Bots Target Corporate Bonds: Will They Take Over the Bond Market Too?

Mike Shedlock
|
Posted: Oct 20, 2017 12:01 AM
Trading Bots Target Corporate Bonds: Will They Take Over the Bond Market Too?
Banks unleashed new trading software systems in an effort to pick up a share of the $6 trillion corporate-bond market. But many issues are thinly traded. Banks tried before and failed. Will they succeed this time?

Will machines take over the bond market too?

Banks including Credit Suisse Group, Goldman Sachs Group, and Morgan Stanley are all making bets in that direction, unleashing new trading software systems in recent months to pick up share in the $6 trillion market for investment-grade corporate debt.

A recent study by the Bank for International Settlements estimated that only 40% of investment-grade corporate bond trading was executed through computers rather than over the phone, compared with 75% in Treasury-debt trading, 80% in stocks and 90% in a broad array of futures contracts.

Now, investment banks are pushing to stoke more electronic trading in the market, especially with small trades that otherwise might fall through the cracks. It is yet another example of banks turning to technology to try to generate revenue growth at relatively low cost.

Starting with smaller trades, those under $1 million, is a safer route for the banks because it doesn’t threaten the profit margins on the big trades they do with institutions.

Some past efforts to change the patterns of bond trading have met resistance or petered out. Platforms offered several years ago by Wall Street players including Goldman and money manager BlackRock Inc. were shelved or integrated into other efforts.

But more recent initiatives, such as networks connecting bond investors to trade with each other, have started to show traction.

Credit Suisse launched its system, called CSLiveEx, earlier this year, making the decision to fully automate the smallest trades in the U.S. market for bonds of corporations with top credit. That means the trades have no direct human involvement.

Before launching CSLiveEx, Credit Suisse responded to fewer than 10% of clients’ electronic trade requests for the smallest investment-grade corporate bond trades. Now the bank says it is responding to virtually all of those inquiries and executing trades twice as often as it did before.

“Banks are giving the algorithms a lot of at-bats,” said Michael Sobel, president of TruMid Financial LLC, an electronic bond trading network. “I fully expect that the folks who are successful will keep dialing up the sizes.”

No Human Involvement

Why involve humans? They tend to do things like panic. If we can just get rid of flash crashes we can keep bonds on the same path as stocks.

Enter the Permanently Rising Plateau

If we can just get rid of this Mish guy, all will be right with the world.