If new electronic trading platforms are to emerge as a source of badly needed liquidity in corporate bond markets, dealers will have to be incentivized to participate, according to new research from Greenwich Associates.

In a new report, U.S. Corporate Bonds: Investors Need Dealers, Dealers Need Incentives, Greenwich Associates interviewed two-thirds of the top 20 U.S. dealers of investment-grade bonds and found 70% have executed a trade via at least one of the new corporate bond electronic-trading offerings, and nearly two-thirds have plans to engage with one of the new entrants in the coming year.  This serves as proof that some dealers are embracing rather than fighting the evolving market structure.

While most dealers focus on RFQ executions, more than half are also streaming executable, non-firm quotes with limited results to date. An even smaller few—only 10%—said they’ve placed a limit order in an order-book-style market.  This style of order-book trading, although encouraging dealer involvement, represents the short-term threat some dealers see if the corporate bond-trading world moves toward anonymous interactions.

“The range of platforms available supports our hypothesis: The market doesn’t need dozens of platforms, but it does need choices to meet the diverse trading styles and strategies dealers and investors present,” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates and author of the report.

Threats, Opportunities and Incentives
Corporate bond dealers are divided on the question of whether new electronic-trading platforms represent more of an opportunity or a threat.

The market’s biggest dealers perceive a threat to their current relationship-driven business but also see opportunity as a potential outlet for low-margin “flow” trades. For smaller dealers, e-trading is both a method to acquiring new clients via aggressive pricing but also a danger to the personal client relationships that form the foundation of their more boutique approach.

“Given that execution quality in the secondary market is the most important factor for investors when determining who to trade with, dealers understandably want recognition for great execution,” says Kevin McPartland.