A bird’s eye view of transaction data in the US corporate bond market indicates an increase in trading activity since the start of the COVID-19 market panic in the US (2/24/20). The ADV of the 35 trading days before 2/24 (pre-COVID-19) was $35bn. Post COVID-19 (2/24 to 3/11), corporate bond market ADV is ~$55bn, a 53% in daily transaction volume.

Given these numbers, it would be natural to assume that liquidity is abundant, however, a closer look at detailed transaction data tells a different story.

Regulators have long warned of the dangers the corporate bond market could pose to financial stability in times of market stress. So far, the risks have been largely theoretical rather than real. But the coronavirus-induced slump in credit markets will now provide a comprehensive test of how bond investors can navigate such storms in post-financial-crisis trading conditions.

Almost $3 billion has fled junk-bond exchange-traded funds in just the first two days of this week, issuance of new debt has dried up and underlying bonds have suffered their worst two-day slump since Brexit. It’s a sharp reversal for a bellwether corner of the debt market that until recently had been brushing aside concerns about the spread of the COVID-19 illness globally while offering investors some of the skimpiest yields to date. 

“The first revolution in electronic trading involved automating request for quotes and Open Trading. We are seeing the second revolution in electronic trading which has been enabled by the pre-trade data provided by CP+ and will lead to radical changes in market structure.”

Sobel and Quinn are helping to lead a midtown Manhattan financial technology startup that’s beginning to revolutionize how large banks, hedge funds and other debt buyers trade corporate bonds. Their six-year-old startup, Trumid, has built an online platform where traders around the world can convey bids and asks of U.S. dollar-denominated corporate bonds to the entire marketplace, and then negotiate matching trades in a few mouse clicks.

In the worst-case scenario, which the Fed terms “severely adverse,” a broad selloff in corporate bonds and leveraged loans hits an array of risky credit instruments and private-equity investments, sending shocks through a variety of markets. The biggest banks in America—a group that includes JPMorgan Chase & Co. and Goldman Sachs Group Inc.—must pass the tests to return money to shareholders.

Data must move cleanly and seamlessly between different systems to avoid lags and errors. Hence the rising interest in special platforms that can combine systems across trading, portfolio management and investment banking, reducing the risk of glitches by allowing data based on one standard to be used across a range of applications. Helping the banks do that are providers such as OpenFin, Glue42 and ChartIQ, each hoping to become the connective tissue of Wall Street.

“One of the consequences of the [central banks] easing again…is that they’re feeding the zombies, the walking-dead businesses that would be out of business by now if it wasn’t so cheap and easy to get credit,” economist Edward Yardeni, president of Yardeni Research, told Barron’s

For what it’s worth, big banks haven’t been willing to let the market they’ve long dominated slip away without a fight. Many of the biggest bond dealers have pushed for direct connectivity with clients, allowing them to circumvent the electronic marketplaces and block out other electronic market-makers all together. 

I would like to see more of a push towards the cleansing of that (corporate bond) data. And that could be by ranking the prices based on those that work, or something similar to Bloomberg’s Magenta Line pricing. Vendors could work better with the banks at tagging runs, levels or prices that are more likely to be tradable than not tradable. That’s where we spend a lot of time worrying.