Fixed Income

Change
creates
opportunity.
Fundamental changes in bond
market structure have created
a new “liquidity-scape,” and
new opportunities to improve
execution quality.
Trading Venues
Fixed Income
A market
structure
sea change.
For many decades, fixed-income liquidity was concentrated
on the balance sheets of primary dealers—mostly large
banks—and traded in a traditional way, counterparty
to counterparty.
But the traditional method of sourcing liquidity and trading
bonds is under pressure: liquidity is flowing in new and
different ways. Dealers’ roles are being redefined. As capital
has become more costly, they have had to reevaluate their
trading models and think more strategically about how
much bond inventory they hold on their balance sheets.
-21%
-48%
Traditional liquidity provider flow ebbs.
Top 10 primary dealer fixed-income balance sheet capacity.
US Corporate Bonds
2007
2015
US Treasury Securities
2007
Greater transparency, prolonged low interest rates, narrow
spreads, and emerging technology are also helping reshape
the bond market trading landscape. The ground is shifting,
and while the dealer community’s role in facilitating trading
remains critical, investors are exploring additional sources of
liquidity and additional trading protocols to meet their goals.
Source: Tabb Group
Within this new, more widely dispersed market, meeting
liquidity demand has become more challenging as the
number of bonds issued has multiplied, driven by a persistent
low-interest rate environment that’s irresistible to issuers
and fuels exceptionally strong investor demand.
Interest in fixed-income investing
continues to rise.
A multi-year streak of good performance and a post-crisis,
risk-averse investor community with a large appetite for
fixed-income assets has absorbed much of the bond inventory
previously held by dealers and financial institutions. Over the
past decade, inflows into bond funds have far outstripped
those of equities.
2015
Billions
$0 $100 $200$300$400 $500
Cumulative flows into bond mutual funds.
$2,000
$1,500
Billions
Risk, regulation, and
technology are affecting the
flow and sources of liquidity in
the fixed-income marketplace.
$1,000
$500
20072008200920102011201220132014
Source: ICI
$0
Navigating new
structural realities.
Traders and investors have had to adapt to new realities,
and to the disruptions and realignment in liquidity that have
come with them. While RFQ remains the prevailing protocol,
asset managers and other market participants are exploring
alternatives—both directly and on electronic platforms.
They’ve found that as the market has evolved, sources
of liquidity, and opportunities to find it, have multiplied.
Forced to innovate or be left behind, the industry has
responded, replacing traditional manual systems with
Order size still matters.
An evolution toward more
fully electronic workflows.
automated workflows that integrate front-toback-office processing with the goal of increasing
workflow and cost efficiency while reducing risk.
The investment in technology and infrastructure
driving these initiatives has given dealers and
banks the ability to more effectively price and
make markets in bonds, react more quickly to
client inquiries, and adjust pricing more nimbly in
an increasingly fast-paced fixed-income market.
Execution protocols align
with order size, but volume
and activity have been
shifting to smaller average
size transactions.
Blocks trade primarily
via voice.
Round lots are executed
using a combination of
RFQ and voice.
Order size
Odd lots are primarily
executed using RFQ
protocols, but have been
steadily moving to a mix
of RFQ and hit-and-lift on
lit platforms with order
books and market depth.
Micro lots are executed
electronically, primarily
through lit markets on ATSs
and electronic mediums.
Tracking the proportion of trades >$5m as a percentage of total par bond trading volume.
80%
While known counterparty relationships and the
traditional RFQ will certainly remain important to the
trading process, we are seeing a growing interest in
the efficiencies and benefits found in electronification:
greater price transparency, broader and more immediate
access to available liquidity, and the opportunity for
timely executions.
Electronic platforms with live streaming prices offer
the bond market more than just price discovery. Access
to liquidity and prices are distributed more efficiently
and across market participants. The platforms provide
accessible and actionable liquidity, with the ability to
execute more efficiently.
As the industry continues to adapt to and adopt open
electronic protocols, the future of bond trading begins
to come into view. Institutional and retail investors will
see the clear benefits: greater price discovery, less risk
concentration, greater efficiency. Technology-savvy traders
will drive an evolution toward more fully electronic workflows
and a greater focus on transparency and best execution.
What am I really paying?
Understanding the best price, the true total cost,
and the quality of execution on a particular trade
depends upon several critical factors, including:
Transaction Cost Analysis (TCA) usage
50%+
2017 (projected)
38%
2014
• If it was done as a riskless principal trade (RPT)
26%
2013
• A clear understanding of what happened
to the price within certain time parameters
post-trade on TRACE.
19%
2012
• The level of pre-trade transparency
• Whether you achieved the quote
• Any associated markup or transaction fee
75%
70%
65%
60%
55%
50%
20072008 20092010 20112012 20132014 2015
Source: FINRA
Source: Greenwich Associates
A recent study by Greenwich Associates suggests that
Transaction Cost Analysis (TCA) usage in fixed income
is increasing rapidly, projecting that more than half of
the fixed-income trader marketplace will be using TCA
actively by 2017.
Measuring
the benefits
of the new
“liquidity-scape.”
To succeed in this new market
structure, firms need to leverage
the long-established benefits
of traditional relationship-based
trading as well as the evolving
benefits of real-time, “click-totrade” electronic execution.
Clarity means knowing
the objectives.
Of course, it all depends on what’s being traded and the
trader’s execution goals. Knowing where to go and who
to call for a certain bond, to secure a large block, or make
an urgent or complex trade, will always remain a valuable
and necessary part of fixed-income trading strategies.
The trade-offs between the need for execution certainty,
the lot size of the order, and the relative liquidity of the
bonds being traded all impact how the order routing
decision is made. More and more, those decisions lead to
electronic execution, and more of those electronic trades
are being made on transparent, continually priced platforms
that give participants immediate access to diverse sources
of liquidity. As this trend continues, these platforms will
continue to attract more participants—and more liquidity.
The net effect of this shift is a more efficient fixed-income
market, with wider participation, lower execution costs,
increased opportunities for price discovery, and access
to an expanding array of securities.
The Execution Spectrum
Market participants that embrace new workflows
and understand the value of all available trading tools
can expand their ability to find and act on liquidity
opportunities across the execution spectrum.
Traditional voice
trading
Multi-dealer
platform
Electronic
trading venue
RFQ
RFQ +
Matched
$
$
$
?
?
?
$
$
$
$
$
$
$
?
?
?
$
?
$
?
?
?
$
$
ONE-TO-ONE
ONE-TO-MANY,
BILATERAL
$
$
ALL-TO-ALL,
ANONYMOUS
$
$
$
?
$
Multi-dealer
platform (RFQ+)
Electronic trading
venue (Matched)
Trade control:
Dealer
Dealers
Equal
Price transparency:
None
Limited
Complete
Discretion:
Take it or leave it
Choose a price
Decide your price
Costs:
Unknown or higher
Unknown or lower
Known and lower
Typical order size:
Large blocks
Mixed
Odd + Micro lots
$
?
?
Traditional voice
trading (RFQ)
$
?
?
$
?
$
$
?
$ $ $
$ $
$
?
?
An established
innovator.
KCG BondPoint was created in 1999 as a “click-to-trade”
aggregator of fixed-income liquidity. With deep roots in
retail brokerage odd lot trading, our platform has grown
steadily as the fixed-income market has evolved to
provide access to a larger and more diverse group of
market participants, including retail and institutional
buy- and sell-side participants.
We combine deep liquidity and smart technology to
create a venue attractive not only to broker-dealers,
but also to an increasing number of investor-side clients.
250,000
KCG BondPoint Average Daily Executable Offerings
Offers
200,000
Bids
150,000
100,000
50,00
Q1
Q2
2012
Q3
Q4
Q1
Q2
Q3
Q4
2013
Q1
Q2
Q3
2014
Q4
Q1
Q2
2015
Q3
Q4
0
Source: KCG
400+ financial firms
50,000+ unique securities
200K+ executable bids and offers
A strong and growing platform.
Open architecture to suit your workflow.
BondPoint offers traders and investors access to a broad
range of counterparties and executable prices. As a market
data resource, it provides valuable strategic price discovery,
including the ability to view full depth of market and source
liquidity all in one location.
We also provide clients with customized trading
solutions and tools, including comprehensive front-end
fixed-income market access and analytics, with a focus
on enhancing operational efficiency by automating
trading workflows. BondPoint integrates seamlessly
into proprietary and third-party OMS platforms, so you
can access the liquidity you want the way you choose.
Subscribers connect across the life of the trade to
streamline pre- and post-trade processes and reporting.
Fully automated and straight-through processing enabled,
KCG BondPoint easily integrates with our clients’ existing
systems, from inventory and order management to middleand back-office clearing.
Find out more about how BondPoint can
complement your trading program today,
and become a valuable strategic tool as your
fixed-income strategies continue to evolve.
KCG Holdings, Inc.
800.764.7609
www.kcg.com/bondpoint
©2016 KCG Holdings, Inc. All rights reserved. KCG BondPoint is an alternative
trading system registered with the Securities and Exchange Commission. In
the United States, products and services are offered through KCG Americas
LLC, member FINRA/SIPC. KCG Americas LLC is an operating subsidiary of
KCG Holdings, Inc. In Europe, products and services are offered by KCG Europe
Limited (KCGE), which is authorized and regulated by the FCA. KCGE is an
operating subsidiary of KCG Holdings, Inc. Every effort has been made to ensure
the accuracy of data contained herein. However, KCG cannot accept liability
for any reliance placed on its use. The information in this material does not
constitute legal or other advice and may change without notice.