Unlocking Liquidity: Leveraging the Network Effect in OTC Bond Trading

A confluence of events is causing the business environment for banks to become increasingly challenging. In 2015, OTC fixed income trading profits fell precipitously and in credit trading specifically, profits declined by 30% or more. Further reductions are forecasted for 2016. Additionally, operational difficulties are making it increasingly difficult for banks to provision liquidity in the traditional manner. Many are capitulating on the notion that this trend is cyclical and have accepted the fact that this is a secular movement. As a consequence, a structural paradigm shift is underway and banks are making operational changes that will fundamentally change the way they interact and service clients.

Few argue that banks will continue to play a critical role in the liquidity equation, but they alone are not enough to solve the current conundrum facing the market. The buy-side must step forward and assume a proactive role in the liquidity equation and realizing this need, trading platforms are deploying solutions to directly connect asset owners to one another.

The game is changing; everyone needs a greater comprehension. The choices to be made are not binary: RFQ or limit order book, disclosed or anonymous, maker or taker. There are varying degrees of all-to-all trading. The key to developing viable solutions is dependent on whether positive effects are generated by the structure, deployment, and use of networks by the buy-side.

In this TABB Group report, Unlocking Liquidity: Leveraging the Network Effect in OTC Bond Trading, TABB Group discusses the differences between networks and networks effects and suggests the buy-side needs to become an active participant in the liquidity equation.