Faced with a historic profit squeeze, banks’ credit traders have set their sights on one of the biggest costs weighing them down: the hundreds of millions of dollars they pay every year in trading venue fees.
The rapid electronification of credit markets has sent corporate bond volumes surging in recent years, delivering a record windfall for trading platforms like MarketAxess and Tradeweb that earn commissions for connecting dealers with their investor clients.
But these technological advancements have also compressed margins for bank trading desks, pushing their revenues sharply lower and prompting many to question the growing share of their trading profits paid out as fees.
The resulting cost-saving drive has put banks on a collision course with the venues that act as conduits for vast amounts of their business, while also encouraging them to develop other trading channels that they say will ultimately lower costs for their investor clients.
“Historically, there has been this perception that electronic execution on platforms is a great story for buyside investors, making it easier and more affordable to trade,” said Kate Finlayson, global head of FICC market structure and liquidity at JP Morgan. “That perception has changed as sellside trading desks have faced margin compression.
"More clients are telling us, even though they’re not getting charged platform fees directly, they are aware of this pinch happening on the sellside and they understand that any impact on pricing [from these fees] ultimately is going to have knock-on effects for them,” she said.
Power shift
The brewing tensions underscore how electronification is upending the way corporate bond markets are traded and organised, shifting the historical balance of power away from bank trading desks.
E-trading now accounts for about half of US investment-grade transactions, according to data provider Crisil Coalition Greenwich, up from 8% in 2013.
This electronic revolution has unleashed a flurry of trading activity as investors have found it far easier – and cheaper – to buy and sell securities. A record US$51bn of US corporate bonds changed hands daily on average last year, according to Crisil Coalition Greenwich, a 64% rise from 2019.
That has been a boon for trading venues such as MarketAxess, Tradeweb, Bloomberg and Trumid, and cemented their place at the centre of these markets. MarketAxess and Tradeweb, which Crisil Coalition Greenwich says account for 70% of US investment-grade bond trades on electronic platforms, have nearly doubled their combined credit trading revenues since 2019 to US$1.2bn, according to company earnings.
That contrasts with a 26% decline in global “flow” credit trading revenues at major banks to US$7.8bn over that period, according to benchmarking firm BCG Expand, as rising automation has also compressed bank profit margins significantly.
“Competition has gotten fiercer as credit markets have become more automated, which is making it harder for banks to make money,” said Kevin McPartland, head of market structure and technology research at Crisil Coalition Greenwich. “We’ve seen this over the decades in other markets. It causes people to look at their costs, not just their revenues.”
Eroding profits
The problem for banks is that growing electronification has driven a relentless contraction in bid-offer spreads, the gap between where traders offer to buy and sell securities. That compression has progressively eroded the revenues banks can generate from selling bonds at higher prices than where they buy them.
For US investment-grade bonds, the median bid-offer spread has more than halved since 2019 to a recent low of 1.4bp in January, according to MarketAxess analysis of TRACE data. Banks’ bone of contention is that the fees they pay to electronic platforms for brokering these transactions haven’t come down as quickly, resulting in these fees consuming an increasingly large share of bank trading profits.
Tradeweb’s average fees for cash credit have declined 21% since 2019 to US$130 per million dollars of volume traded last year, while MarketAxess's average fees are down 28% to US$139 per million. For comparison, Tradeweb charges average fees of US$2 per million of volume traded on cash interest rate products like government bonds, which have far tighter bid-offer spreads than corporate credit, while MarketAxess charges US$4.
Spokespeople for Bloomberg, MarketAxess, Tradeweb and Trumid declined to comment for this story. IFR is part of LSEG, which also owns 51% of Tradeweb.
Value for money?
In private, trading venues argue that their fees represent good value for money. As well as funnelling huge volumes of client trades towards market makers, these platforms have been at the forefront of developing new trading protocols that have benefitted banks and investors alike.
One notable example is portfolio trading, when investors can buy or sell large blocks of bonds in one go. Portfolio trading has grown rapidly in recent years, generating massive client flows for banks. Such innovations require significant investment, venues say.
“These trading venues have proven their worth over the years as a distribution mechanism. They've also innovated pretty consistently with new technology,” said McPartland. “It’s a constant tug of war. Dealers would rather pay less, but the value that these platforms provide also keeps the market moving forward.”
Banks, for their part, are already adapting their businesses for this new, lower-margin world of corporate credit. Rehan Latif, global head of credit trading at Morgan Stanley, said the US bank is looking to connect directly with clients – something that makes sense for the largest investment managers because of the sheer scale and size that they transact.
“We need to really think about our cost base,” said Latif. “There are a lot of tools we can use, it just takes time and it requires us to invest in it. It also requires clients to want to prioritise it as well. We need to capture their imagination around this issue.”
Mike Daniel, head of flow credit and securitised products trading at Citigroup, said the model of connecting directly isn't going to work for most customers because it's not efficient for them to onboard every broker-dealer.
However, he said there is the potential for banks to stream prices to an intermediary technology that uses what he called more of a utility-based model as "a competitor to current trading venues”.
Evolving markets
Finlayson at JP Morgan said more resources are being devoted towards the development of what she called a “network-centric” effect when it comes to liquidity.
“Buyside clients are looking at how they can aggregate all their liquidity sources. Do I connect via an API? Do I have an execution management system that helps me to aggregate all these liquidity sources? That also comes with costs. But there can be significant advantages around minimising information leakage and pricing,” she said.
There is certainly some irony in banks looking to disrupt part of the market infrastructure that they played a pivotal role in developing. Tradeweb was conceived in the mid-1990s at Credit Suisse First Boston and grew over the years in part thanks to investments from major banks. Rick McVey, a former JP Morgan executive, launched MarketAxess in 2000 after coming up with the idea while working at the US bank.
Ultimately, many believe that trading practices will continue to evolve as credit markets mature – and that multi-dealer platforms will keep playing a central role. McPartland noted that in equity and FX markets, which are further along in their electronic journey, there are direct connections, algos and multi-dealer platforms that “all work in harmony” for different clients depending on the situation.
“We’ve long supported the role electronic trading venues play in the evolution of credit market structure," said Sam Berberian, head of credit trading at Citadel Securities. "As the market continues to become more electronic, competitive and efficient, it is important that the economic model across the ecosystem evolves as well in ways that support liquidity, transparency, and strong outcomes for end investors.”
