Concerns about a liquidity shortage in UK corporate bond markets are “justified”, according to researchers at the Financial Conduct Authority, but liquidity is still “relatively healthy”, when measured across the last eight years since the financial crisis.
New data reviewed by FCA researchers highlighted that trading has become more difficult across the last two years, according to the report prepared by Felix Suntheim, a technical specialist in the FCA chief economist’s department, and Matthew Allan, a senior associate in its markets policy department.
The findings are potentially significant because previous research had found “little evidence of a quantifiable deterioration in liquidity”, the UK regulator said.
The analysis, which the FCA research team said combines both traditional and non-traditional measures of liquidity, indicates trading conditions have generally become more difficult from 2014/2015 onward. The UK’s secondary market for corporate bonds – where over half a trillion pounds worth of debt changes hands each year – is the largest such market in Europe and plays an important role in linking investors with corporate issuers.
The FCA document stated that a number of investors have “raised concerns” that post-crisis changes to market structure, technology and regulation (among other factors) are affecting their ability to buy and sell bonds in today’s secondary market.
“Previous research by the likes of FINRA, the AMF and IOSCO, as well as our economists, had found little evidence of a post-crisis drop in liquidity,” the document reads.
“We have updated our study by extending our analysis to include the period after 2014, as well as incorporating new data about orders and quotes. Our analysis of data from our transaction reports and a variety of other sources suggest there has been a decline in liquidity since 2014 – but liquidity still seems relatively healthy compared with the entire 2008-2016 period.”
For example, it said that it found:
- A decline in dealer quote rates on electronic bond trading platforms.
- A slight widening of some quoted and effective bid-ask spreads.
- An increase in transaction based measures such as the price impact of trades and round-trip costs.
“We also find that from mid-2014 there has been – at least for some firms – an increase in the amount of time it takes to trade and an increase in the amount of failed or rejected trades,” the document stated. “This tallies with the anecdotal experience of some buy-side traders who report sitting at their desks trying to trade at dealers’ advertised prices, but having their attempts to trade rejected.”
Taken together, the evidence indicates that trading conditions have become “more difficult over the past 18-24 months”, it concluded.
Click here, to view the FCA’s full research document.