What the Last Decade of Electronification Tells Us About the Future of U.S. Credit Markets

When it comes to financial markets embracing electronic trading, it's no secret that adoption in U.S. corporate credit electronic trading has generally lagged other markets. Tradeweb recently marked the 10-year anniversary of launchingour U.S. Corporate Bond Marketplace. So, it is no small thing that electronic trading of U.S. investment grade credit is finally closing in on representing half of total trading in that market. Still, that's a big difference from other fixed income asset classes, like rates, derivatives and mortgages, which have been trading largely electronically for the better part of a quarter century.

That huge gap in technology adoption is so palpable for me because I still remember how shocked I was that it even existed when I landed on the credit desk at BlackRock in 2010. Still just a couple of years out of college and a card-carrying member of the iPhone generation, I was amazed when I found out just how analog credit markets still were, despite market participants already pushing for more electronic trading. Although there were clear advancements happening, it was obvious that credit trading still had a long way to go. At a time when the Flash Boys were redefining equities trading with automated electronic algorithms, the credit desk still looked like a throwback to the era of Liar's Poker.

A lot has changed since then. Over the past decade, the credit markets changed significantly due to shifts in participant behavior, new electronic tools and protocols, and a growing recognition that change was not only necessary but inevitable. As I reflect on the key moments and drivers that made these advancements possible, the future of electronic trading in credit markets is really starting to come into focus.

An Evolutionary Approach

To truly understand the evolution of the credit markets, it's important to first recognize why market participants have historically relied on relationship-driven, phone-based trading protocols. Chief among them is the fact that corporate bond markets have some unique characteristics that make trading them a little different than other fixed income asset classes. The market structure of the credit markets includes a large number of issues traded, each with its own terms, structure and attributes. This complexity made it more difficult to apply electronic trading in the same way that more standardized, liquid asset classes like U.S. Treasuries did. Each individual workflow, like net spotting for example, whereby credit traders offset risk by benchmarking to Treasury trades, historically required a nuanced, relationship-driven approach. For many market participants, those details kept them from fully embracing early electronic trading platforms. However, the growing need for more efficiency, transparency and reliability has made the transition to electronic trading increasingly clear.

In fact, when fintech companies burst onto the scene with new tech-enabled approaches that promised to disrupt credit trading, many market participants recoiled initially. Replicating all aspects of the institutional workflow in an electronic format felt perhaps like a step too far and a tad too soon. While a handful of players have succeeded at transforming this market, many of these start-ups found out the hard way that credit markets were not like the others.

While aspects of the credit trading workflow were already electronic when I first started my career, the reality was that many areas still needed significant modernization. Even once I'd been working on the credit trading desk for a few years and my firm began conducting some credit trades electronically, I still couldn't believe that I had to pick up a phone and start making calls to different desks to get a price. I kept pushing for more widespread adoption of electronic trading and, over time, started to find myself part of a new generation of traders committed to transforming the credit markets. Over time, we began to see the pace of this evolution pick up.

Improving Workflows, Slowly at First, Then All of a Sudden

Meanwhile, as momentum for change was accelerating in these markets, Tradeweb had introduced a credit trading platform that wasn't like many of the others in the space at the time. Instead of preaching disruption and reinvention, Tradeweb was quietly making refinements to legacy workflows and systematically addressing pain points in the analog credit trading process that had frustrated many of us for years. One advancement introduced by the Tradeweb team that particularly impressed me at the time was multi-client net spotting, which allowed credit traders to instantly compress interest rate risk through seamless hedging on Tradeweb's U.S. Treasury marketplace. Suddenly, that clunky, but nuanced process that required way too many phone calls was being streamlined without creating any real disruption to the trading process. It was just getting easier.

After nine years experimenting with electronic trading from the client side, I decided to join the Tradeweb team in 2019 to collaborate with my new colleagues on advancing this evolutionary approach to credit markets from the inside. I quickly began to realize that this systematic approach - working with clients to tackle pain points one-at-a-time without overreaching - was the key to unlocking electronic credit trading. Capabilities like portfolio trading, which made it possible to trade large baskets of risk, and advanced portfolio analytics, which made it possible to better seek best execution, gradually won over the holdouts and volumes started to grow rapidly.

And that story continues to play out: As of September of this year, electronic trading of U.S. investment grade credit had reached 50% of total volumes and U.S. high yield volumes were at 32% of total volumes, according to Coalition Greenwich.

Setting the Stage for the Future of the Credit Markets

What this all tells us as we look ahead to the next decade of credit markets innovation is that slowly, but surely, electronic credit trading will just become credit trading. The traditional, analogue processes still associated with some aspects of credit trading will continue to fade and, in its place, we'll find increased adoption of pragmatic tools that improve results.

Based on our current work with clients and dealers, the areas where we expect to see the most significant advances in the months and years to come are in the areas of multi-asset class pair trading, such as Portfolio Trading coupled with an ETF, and greater focus on advanced analytics at the time of execution. Our recently launched RFQ Edge functionality, for example, integrates portfolio trading analytics directly into our request-for-quote (RFQ) protocol, giving clients access to real-time trading data and predictive analytics directly in their trading workflow. That's a far cry from having to call the Treasury desk to get a spot price before calling five different dealers to execute a trade.

Together, these steady improvements to workflows and the competitive edge they confer will help set the stage for the next generation of credit markets.

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