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As credit liquidity evaporated, some investors pounced on a bond fire-sale with the help of electronic trading platforms. Insiders explain how a wild 2 weeks unfolded.

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  • As volatility rocked credit markets in March and traditional dealers stepped away, electronic trading platforms saw record volumes.
  • All-to-all, an anonymous form of trading in which trades are sent out to the entire market — not just dealers — and can be executed by anyone, enjoyed increased activity.
  • Investment firms with cash on hand were able to buy up high-quality bonds at far cheaper prices thanks to all-to-all trading.
  • "I was getting filet at $2 a pound," Steve Chylinski, head of fixed-income trading at Eagle Asset Management, told Business Insider.
  • Executives at MarketAxess, Tradeweb, Trumid and Liquidnet explained why they believe the record volumes they saw in March in all-to-all trading will persist. 
  • "Generally speaking, these sort of events accelerate the trends that are already in place," Mike Sobel, Trumid's president, told Business Insider.
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John McClain often uses metaphors and analogies to help conceptualize market events to investors. And so as the US credit markets began to melt down during the coronavirus pandemic in March, the portfolio manager at Diamond Hill Capital Management felt a fitting example was food.
A feast was indeed on hand for the $23 billion asset manager. In fact, any firm in the credit market with capital to play with had an opportunity to dig in.
Funds facing massive outflows were in dire need to cash out positions, essentially making them forced sellers. Meanwhile banks, the traditional dealers in the credit marketplace, were limiting their trading activity due to their reduced balance sheets.
The resulting environment was one filled with endless opportunities for those looking to buy.
"Today, filet is priced like hamburger meat, caviar is priced like peanut butter, and we will even spring for a bottle of Dom Perignon if it's priced like Yellow Tail," McClain wrote in a note to investors on March 23.
Steve Chylinski, head of fixed-income trading at $30 billion Eagle Asset Management, described the experience as unlike any he faced in his 20 years in the business. Funds in desperate need of cash were selling off the debt of blue-chip companies for pennies on the dollar.
"You have massive redemptions in all of these funds, so they're going to sell their best, high-quality, shortest-duration bonds that are going to take the less price hit to their NAV (net asset value). So they were just flooding the markets with inside of five-year, high-quality corporate bonds," Chylinski told Business Insider. "I was getting filet at $2 a pound. Waive it in. I'm going to keep on buying that."
All of this was made possible thanks to the rise of all-to-all trading, a protocol in which customers can post orders anonymously to the entire market, not just dealers. Electronic platforms MarketAxess, Tradeweb, Liquidnet, and Trumid all saw huge upticks in trading volume thanks in large part to the trading feature.
And as electronic marketplaces fight to convert more trading off telephones and onto their platforms, the success of all-to-all could serve as a shining example of the benefits e-trading can offer a market long stuck in the past.
"These providers are going to get more people signed up and they're going to execute more of their volume this way because investors have gotten comfortable with it," McClain said. "When Amazon first came around a lot of people were hesitant to put their credit card data online. Now we just point and click. I think that's where we're at now, where it's just point and click. Execute anonymously. That is the future of a fixed income."

All-to-all trading dates back to BlackRock and the financial crisis

As is the case with many recent innovations in the financial market, the impetus for all-to-all trading dates back to the 2008 financial crisis.
Unhappy with its inability to source liquidity during the crisis, BlackRock looked into creating a platform where trades could be executed anonymously between everyone in the market, as opposed to going directly to dealers. The behemoth asset manager eventually partnered with MarketAxess and its all-to-all offering, Open Trading, which launched in 2012.
Other platforms would soon follow with their own spin on some form of anonymous trading. While a slow build at first, the rise of electronic trading in general has led to more interest in all-to-all trading. Open Trading at MarketAxess, the largest electronic platform for US corporate bonds, accounted for roughly 27% of all trading activity in corporate bonds on the platform in the fourth quarter of 2019.
But March brought with it volatility at levels rarely seen in the credit markets, leading to a significant boost in all-to-all trading.
At MarketAxess, Open Trading for the month was a record $96.3 billion, nearly double the amount traded during each of the previous two months, and accounted for 37% of total trading volume at MarketAxess.
A Tradeweb spokesperson said anonymous credit trading was up a third in the first quarter compared to the same time period last year. The trading venue declined to break out numbers specifically regarding all-t0-all trading, but the $93.8 billion traded on the entire platform in US corporate bonds in March was also a record high.
Liquidnet, which operates an anonymous trading platform specifically geared toward the buy-side, saw massive growth as well. Constantinos Antoniades, head of fixed income at Liquidnet, told Business Insider there was a 130% uptick in trading volume from February 24 to April 15 compared to the start of the year.
Newcomers even enjoyed big gains. Trumid, the startup electronic bond trading platform founded in 2014, traded a record $20.6 billion in March, 40% of which was done anonymously, Mike Sobel, Trumid's president, told Business Insider. By comparison, anonymous trading typically accounts for 25-30% of Trumid's trading activity.
"It's a new way of trading for many people. You don't expect to see leaps of 500 to 1,000 basis points in a couple of months," Richard Schiffman, head of Open Trading at MarketAxess, told Business Insider.  "So clearly something happened in March that really opened everyone's eyes to what's available here, what opportunities they can take advantage of."

Investors used all-to-all to provide liquidity to the market

The story of the credit markets in March wasn't just about how trades were getting done, but also who was doing them.
In the wake of the 2008 financial crisis, regulations were put in place to limit the amount of risk big banks can take. The result was dealers limiting their balance sheets, meaning they could hold less securities.
As volatility picked up in the credit market in March, funds facing outflows and needing cash fast were in a pickle. Dealers weren't always a viable option, as they were unwilling to take on risky trades, and unable to efficiently price bonds systematically, forcing spreads to widen.
Previously in times like these, funds looking to make trades would likely be forced to call dealers they had the best relationships to beg for bids, Eagle's Chylinski said. This time around, though, all-to-all trading gave them another option: each other.
Firms were able to turn to all-to-all trading to get the liquidity they were desperately seeking at prices better than any dealer would offer directly. Meanwhile, those firms with cash on hand were able to take part in the firesale of the century.
"If you have to go and ask someone for a price that they don't really want to make, like a dealer for example, you will get a worse price, smaller size. By the way, you disclose a lot of information, probably," Liquidnet's Antoniades said. "The value of being able to find the one opposite that cares about the bond they would like to buy or sell in an anonymous protocol. ... That is now much more precious than before."
Chylinski said his team put together a wish list of bonds they'd be interested in buying. The result was a trading frenzy, in which Chylinski estimated he traded roughly four times as much on MarketAxess' Open Trading and triple the amount typically done on Trumid and Liquidnet.
"Normally the dealers would have gobbled this up at way better levels, but they couldn't. They were full. The algos were getting crushed. So they were either turned off or showing ridiculously wide markets," Chylinski said. "So the liquidity providers of last resort were the buy side or the insurance companies."
Diamond Hill's McClain said it was the busiest month of his career, with trading volumes in March going up six times as much as usual.
Long-only firms accounted for nearly a quarter of the liquidity provided on Open Trading in March, a 5% uptick compared to the entire Q1. At Trumid, 35% of trades were done between investors, representing a 50% bump from the previous two months.
Even those without deep expertise in electronic trading were able to take part.
Ryan Mitchell, a portfolio manager for investment grade credit at $230 billion Voya Investment Management, told Business Insider normally he doesn't rely too much on electronic trading platforms. However, in March he estimated he traded five times as much via platforms anonymously.
"The liquidity goes away and we step up and try to become a big part of providing that liquidity on those electronic platforms," Mitchell said. "There's not as much price discovery, but if you have a good grasp of the credits and a good grasp of the markets, you may be the only bid on a lot of stuff or the only offer in a really hot market."

Questions remain if all-to-all trading can maintain high levels

To be sure, there is no denying the impact the Federal Reserve's announcement towards the end of March to buy up bonds had in bringing liquidity back into the market.
However, Chylinski said things could have been a lot worse had it not been for all-to-all trading.
"It would have been really ugly," he said. "For that two-week period, that black hole, there would have been no bottom to it. It would have been really ugly for some of those firms seeking liquidity who just couldn't get it."
While there is no denying the success all-to-all trading had in March, questions still remain around whether it can maintain even some of the additional trading volumes it captured during the month. Less volatility in the markets has led to a return of dealers and normalcy.
Trading platforms maintain all-to-all trading volume is still slightly elevated. Trumid's Sobel pointed to the 1987 stock market crash, the 2000 dot-com bubble, and the 2008 financial crisis as examples of events that tested market infrastructure and led to seismic shifts in the market landscape.
"Generally speaking, these sort of events accelerate the trends that are already in place," he added. "The electronification of workflows have been on a steepening adoption curve already. This has absolutely accelerated it."
Chris Bruner, head of US credit product at Tradeweb, said March served as a lesson for firms on the benefit of diversifying trading across multiple electronic protocols, whether that be all-to-all, portfolio trading or traditional request-for-quote trading.
"How do I electronify and make as much of my process safe and really robust in a chaotic market," Bruner said. "That's a strong theme."
Market participants remain torn on what type of lasting impact the event could have. Some say March was largely an outlier event. With the return of dealers offering more liquidity, the need to go to all-to-all venues is reduced.
Others, however, say March served as a taster for the potential that comes from trading anonymously. As a result, firms will be eager to make sure they are better prepared next time around.
"Those people who really didn't have the technology and processes built out that are going to be like, 'You know what, we need to figure it out. We need to find a way to take advantage of this on our day-to-day operation,'" Chylinski said.
SEE ALSO: Wall Street banks have seen electronic trading chip away at their control of the corporate bond market. Now they're fighting back.
SEE ALSO: Wall Street's disaster playbook never included work-from-home trading. Insiders explain how banks rapidly adjusted during one of the most chaotic markets in history.
SEE ALSO: Point72, Renaissance Technologies, and Millennium are trying to make quant strategies work in bond markets. Here's why their nascent credit-trading teams face an uphill battle.
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