Illiquid and dysfunctional: corporate secondary during Covid-19 - ICMA

2 min read
EMEA
Ed Clark

ICMA has released new analysis of the impact of the coronavirus crisis on the European secondary corporate bond market, and in particular the significant effects on liquidity.

Hugely widening bid-offer spreads highlighted the deterioration in market liquidity, which had reached a nadir by March 18 when participants reported that the market had become dysfunctional, ICMA said.

The report indicates one critical factor was the breakdown of electronic trading during the crisis.

"It would have been funny if it was not so serious, but we heard trades were getting done, it's just that the prices had nothing to do with what was on the screens," said a syndicate banker.

This was not caused by any technological failure, but rather the market had become too volatile and too illiquid for dealers to provide pricing across electronic platforms. In the end market participants resorted to voice trading to find a solution, and algorithmic trading all but ceased.

Nonetheless, large trading volumes were recorded through electronic platforms, but using different trading protocols, for example, processed trading where a price is agreed on the phone or messaging and then "consummated" on a system.

At the height of the crisis a large number of settlement fails were also recorded. ICMA largely attributed this to the transition to working from home during high trading volumes.


MAKING MARKETS

Another issue with market structure highlighted by the report was the willingness of market-makers to provide liquidity.

Dealer capacity appeared to shrink when it was needed most, the report said, although many banks did step up and provide liquidity, albeit at wider bid-offer spreads.

While it would appear that generally stricter capital rules and smaller balance sheets for market-making is important, the report highlights some cases of dealers stepping away from their usual market-making activities, either because of bank-wide policy or less experienced trading desks.


PEPP TALK

Central bank intervention, particularly the announcement of the ECB’s Pandemic Emergency Purchase Programme on March 18, was cited as critical in ensuring that the European secondary bond markets continued to function.

Not only did it provide a backstop bid for a large section of the market, more importantly it restored confidence, ICMA said.