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Institutional Investor discussed advances in electronic fixed-income trading with Richard McVey, CEO of MarketAxess Holdings.
Liquidity concerns have become paramount in the secondary credit market. How is MarketAxess disrupting the traditional trading model?
Our response to this is to find complementary sources of liquidity beyond traditional dealer liquidity. We’re trying to complement that base with nontraditional counterparties that can expand the liquidity pool and reduce cost. The need is very clear.
About 20 percent of U.S. high-grade volume is traded electronically today. What is going to drive even greater adoption of e-trading in credit?
The driver of growth in e-trading continues to be greater efficiency and lower transaction costs. As we expand, our goal is further reduction in transaction costs. Investors will need e-trading more when the market volume picks up, since that’s when there are more trades to do and when there will be a need for e-trading to bring more efficiency to the market.
Open Trading represented 13 percent of US high-grade and high-yield activity on MarketAxess in the third quarter of this year, double the period figure in 2014. What does the future of Open Trading look like?
We are still in the very early stages. The good news is that in the third quarter alone we saw 421 institutions respond with a price to an Open Trading inquiry, among which 40 percent were dealers and the rest were nontraditional liquidity providers, led primarily by investment managers. So over 250 nontraditional investment firms have changed their trading process to lead with price and respond to an inquiry. Only about a third of our largest investor clients are regularly active in the open order book, and what that tells us is that when the other investment managers embrace the new protocols, Open Trading is likely to represent a much higher percentage of trading in the credit markets.
Exchange-traded funds are growing in size and importance among fund managers. How can e-trading support the ETF markets?
Activity from participants in the ETF market has grown significantly over the past several years; it is an ecosystem that lends itself to e-trading. There is already a trend for a higher percentage of e-trading in ETFs than in the active investment management industry. ETFs are another base of assets with a daily redemption feature, so if ETF flows go the other way, it is important to have a broad, deep secondary market to cover those trades. ETF market makers are active in Open Trading because we provide expanded secondary market opportunities to facilitate relative value trading between fixed income ETF shares and the underlying bonds. This serves to improve secondary market liquidity and reduce basis risk in ETFs.
MarketAxess now provides data analytics, compliance tools and posttrade services. Will you be expanding into other new product areas or geographies?
In terms of geographies, we really have ramped up our investment in Europe and are seeing much-improved client adoption rates across products and segments. MiFID II is also likely to accelerate more e-trading in Europe. We also have incrementally added resources in Asia, where we are starting to see a pickup in emerging-markets debt, local debt and externally issued debt.
The key takeaway is, no matter how you look at it, e-trading is growing but still is in early stages, so given market demand, e-trading is likely become much larger over the next three to five years.
For more information, please visit www.marketaxess.com
