The revised Markets in Financial Instruments Directive (MiFID II) is driving digitalisation in the corporate bond markets, with more than half of investment-grade corporate cash bond trading volume now conducted electronically in Europe, according to the report European Corporate Bond Trading: Impacts of MiFID II, by Greenwich Associates. This compares with only 19 per cent of of electronic trading volume in the US. And electronic trading is expected to increase further, as dealers try to minimize skyrocketing compliance costs with new technology platforms.
Investors are, however, waiting to see what this means for liquidity in the market longer term, amid concerns that there could be less liquidity in corporate bonds due to the increased transparency. The report's author, Brad Tingley, said: “Despite these concerns, increases in dealer competition should ultimately result in tighter spreads.”
Liquidity in the corporate bond market was reducing even before the introduction of MiFID II and, according to the Greenwich Associates report, institutional investors are looking to alternatives such as single-name credit-default swaps (CDS) and corporate bond ETFs for liquidity. Tingley adds: “Investors are taking these steps to ensure liquidity in the short term. Over a longer-term horizon, increases in transparency and efficiency brought on by MiFID II and the continuing electronification of market will be a long-run benefit for all involved.”
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