Tech-savvy firms like Jane Street and Millennium are improving liquidity in bond trading and forcing old-school bond desks to innovate, according to investors

• A recent survey found a majority of investors think non-bank dealers are improving liquidity in the corporate bond market.
• Respondents also suggested firms such as Jane Street and Millennium are forcing banks to improve their technology and how they offer liquidity.
• In November 2019, 34.4% of the average daily trading volume in investment-grade corporate bonds was done electronically, a 39% uptick from the beginning of the year.
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Some of the newest players in the bond market are making the most noise and forcing big banks to evolve, much to the delight of investors.

A recent survey of bond investors conducted by research and consultancy Greenwich Associates found a majority (65%) believe non-bank market-makers - most notably Jane Street, Millennium, SumRidge, and Susquehanna - were improving liquidity in the market.

Respondents, of which there were 69, also suggested the presence of these new entrants, the aforementioned four of which were cited the most frequently, is pushing big banks to improve their tech (42%) and how they offer liquidity (25%).

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Trading of US corporate bonds, a $9.2 trillion market in 2018, has traditionally been dominated by a handful of the largest banks. However, in recent years the market has transitioned from a relationship-based one where trading takes place over the phone to electronic.

In November 2019, 34.4% of the average daily trading volume in investment-grade corporate bonds was done electronically, according to Greenwich Associates, a 39% uptick from the beginning of the year.

The growth of electronic marketplaces, such as MarketAxess and Tradeweb, which went public in 2019, have played a part in the electronification of the market. So, too, has the rise of fixed-income exchange-traded funds, which has led firms to look for ways to manage risk in the products by trading the underlying bonds.

The culmination of these factors is the arrival of tech-savvy firms, such as Jane Street, GTS, Point72, Renaissance Technologies, and Millennium.

For what it's worth, big banks haven't been willing to let the market they've long dominated slip away without a fight. Many of the biggest bond dealers have pushed for direct connectivity with clients, allowing them to circumvent the electronic marketplaces and block out other electronic market-makers all together.

Banks have also put significant resources towards portfolio trading, which allows them to trade as much as a billion dollars worth of bonds in a matter of minutes.

Still, it appears investors are happy to see new players enter the space.

Roughly half of respondents said when trading electronically the counterparty either matters "a little" or "not at all." It's a noticeable shift from years past, where relationships built between banks and their customers were highly valued in bond trading.

And while some respondents warned about the possibility of non-bank dealers creating more volatility (19%) - a gripe many in the stock market have had against high-speed traders - the majority seem open, and appreciative, of new blood entering the fray, the report notes.

"Liquidity takers have been quite welcoming to this new breed of liquidity provider," wrote Kevin McPartland, head of research for market structure and technology at Greenwich Associates. "The corporate bond market seems to be avoiding the "flash boys" stigma and appreciates the value brought to the market by electronic market makers."