Fixed Income Liquidity: The Sell-Side Perspective
With Liana Seah, UBS’s APAC Head of e-Fixed Income Sales
Two thirds of 116 institutional investors across Asia surveyed by UBS on secondary liquidity in corporate bond markets were dissatisfied with available levels of secondary market liquidity. The survey, conducted in January this year, showed that a decline in liquidity had promoted a shift in asset allocation away from high-yield bonds towards investment grade and sovereigns, where credit quality is superior and issue sizes tend to be larger. In addition, we also saw a shift in client strategies to a more long-term, less trading-orientated strategy.
Role of the sell-side
The role of the sell-side is twofold: first, as a principal which will manage the risk of the inventory (RFQ-driven model); and second, as a facilitator to identify interest among its client universe (order-driven model). Clients still benefit from the bank’s holistic service of content and execution. With the deterioration in secondary market liquidity, the RFQ-driven model is no longer the default execution model, especially with smaller issue-sizes. We can expect the current constraints affecting sell side’s ability to provide liquidity to remain.
The more pertinent question is: Does the buy-side have the capacity and/or the will to become liquidity providers when liquidity is scarce? Our survey showed that clients want an easy-to-use and transparent client-order facilitation system, and that they are also amenable to us accessing different liquidity pools across time zones and regions. A clear and transparent mark-up schedule shows clients both that their orders are not being treated as free options, and that the reach of our electronic platform is in their best interests. This shift in buy-side mentality towards liquidity contribution will be a crucial point in the success of the agency model.
There is a race to providing all-to-all execution venue, looking to build up liquidity provision from buy-side firms. While an all-to-all venue is the Holy Grail, fragmentation in the fixed income market can be expected to prevail for the foreseeable future. We believe that no one single platform will be dominant, and we expect to see a more balanced split between RFQ model and order-driven model emerging.
In the RFQ model, different electronic platforms dominate particular markets, while in domestic markets there are electronic platforms for local government bonds. Similarly, using the agency model, the buy-side now requires access to all relevant venues without incurring operational or other technology-related overheads. There will also be requirements for sell-side firms to route the client orders to the best venue, both on voice and electronically. A concept known as smart-order routing, this is widely used in exchange-traded markets.
The market needs many sources of liquidity, such as auction venues and crossing venues. These innovations are necessary to ensure there is enough liquidity during times of distress and dislocation.
UBS clients are served by UBS Bond Port (previously UBS PIN-FI), a Matched Principle Trading venue where clients can access various sources of liquidity: from other UBS clients, other third-party venues, as well as from UBS.
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