November 14, 2024 — Convertible bond trading is going electronic—at least partially.
At first glance, convertible bonds might not seem like a perfect fit for electronic trading. Convertible bonds combine elements of bonds, stocks and derivatives, making them a unique asset class. Relative to products like equities, U.S. Treasuries and even traditional corporate bonds, “converts” are much more varied and complicated in structure, and considerably less liquid.
However, recent advances in electronic execution quality and trading efficiency have captured the attention of convertible bond investors. In Europe, roughly half of convertible bond investors now trade at least some of their volume on electronic platforms. In the U.S., electronic trading of convertible bonds was slow to catch on initially but is now gaining momentum. As recently as 2022, only about 1 in 10 convertible bond investors were trading electronically. That share has nearly doubled to 20%.
“The growth of electronic trading in the convertible bond market has created a virtuous cycle, with more liquidity providers creating deeper markets, attracting more liquidity takers and fostering competition among price makers,” says Jesse Forster, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Electronic Trading Growth in Convertible Bonds. “This has led to better prices, reduced opportunity costs and improved execution quality for market participants.”
Bigger Orders, Better Execution
As traders become more comfortable with electronic platforms, they are starting to place larger orders, with data from Tradeweb showing that trades with notional values of $5 million and higher have grown more than 50% year over year. The shift toward larger, more difficult orders is led by several factors, including improved performance, reliability and functionality of multidealer platforms (MDPs), as well as enhanced data access and workflow efficiency tools.
Regulations, such as MiFID, have played a part in driving the adoption of MDPs, as firms are forced to demonstrate that they have taken all reasonable steps to obtain the best possible result for their clients. In the U.S., a similar emphasis on achieving best execution through better performance and efficiencies has taken hold, with MDPs providing a centralized platform for investors to access multiple dealers and compare prices.
“Convertible bond traders want the same automation, execution and analytics tools their colleagues are using over on the corporate bond desk, and dealers are looking to inject efficiency and cost reductions into their convertible trading operation,” says Jesse Forster. “The resulting growth in convertibles e-trading proves that when market participants have the right tools and incentives, even less-liquid products can be traded electronically.”
Electronic Trading Growth in Convertible Bonds tracks the growth of electronic trading in convertible bonds, including usage rates and adoption drivers for e-trading and multidealer platforms in North America and Europe, criteria used by investors in allocating trading flows to dealers, positive trends in execution quality and order size, and the primary benefits investors receive from electronic trading.