Little in finance has stayed the same over the past 30 years, but fixed-income investors could always count on Bill Gross to be PIMCO’s bond king and a human trader to answer the phone. Well, Gross has gone to PIMCO rival Janus Capital, and live traders may be a dying breed.
When interest rates rose last year, money managers and investors got a taste of how tough it might become to buy and sell corporate bonds. Amid roiling fixed-income markets after Gross announced his departure from Pacific Investment Management Co. last month, some traders say they couldn’t even get a bid on high-yield paper. Liquidity decreased about 25 percent in the spring and summer of 2013 after the Federal Reserve warned that it would pare its bond buying, which had helped keep rates low. Since the financial crisis, as investment banks have deleveraged, there’s been less liquidity sloshing around the system. Given the threat of higher rates, investors are looking for new ways to transact in bonds.
Although electronic trading isn’t a fix for the market’s woes, it may be part of the answer. With electronic platforms, buyers and sellers can more easily find alternative sources of liquidity. Kevin McPartland, head of market structure and technology advisory at research firm Greenwich Associates, says a recent Greenwich survey found that 69 percent of buy-side firms did some electronic trading in 2013. By the first quarter of 2014, that number jumped to 80 percent. McPartland explains that in the past a dealer would immediately take a manager’s entire $100 million position; this year they’d maybe take $20 million. But many old problems plague the use of new technology, he stresses. For example, managers want to maintain their cozy relationships with the biggest dealers so they can keep accessing new corporate issues.
The best managers are buying into electronic trading to prepare for the worst, according to Michael Chuang, CEO of fixed-income trading software provider iTB in New York. “One manager told me, ‘I don’t need this now, but when volatility hits, I’ll call the dealers and they won’t answer,’” Chuang says. “In case of emergency, break glass: That’s electronic trading right now.”
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