Institutional and retail trading converging in U.S. corporate bonds
- Institutional trading of U.S. corporate bonds has traditionally been spread-based via request for quote.
- Retail and wealth activity has surged as separately managed accounts (SMAs) and exchange-traded funds (ETFs) have made corporate bond investment easier and on-screen price-based click-to-trade has taken off.
- Both parties are now executing in the same liquidity pool as trade volume has soared, ticket sizes have fallen and odd lots have traded more frequently.
- ICE Bonds is unifying these two worlds by introducing spread-based click-to-trade, enabling institutional investors to execute corporate bonds on-screen, gaining more visibility into market liquidity and preventing RFQ-associated information leakage.
The U.S. corporate bond market of 2025 would be almost unrecognizable to a credit trader running a bond desk 20 years ago. What was in 2005 a largely voice-intermediated business built around personal relationships and dominated by round lot block trades has today been utterly transformed.
The electronification of bond markets, the at-scale deployment of algorithmic trading, the emergence of a truly liquid secondary market, and the rise of SMAs have converged to reshape longstanding corporate bond trading practices.
SMAs have played a particularly important role, with AUM growing from just $951 billion in 2017 to almost $2.2 trillion by the end of 2023.1 Growth has been driven by wealth managers seeking to customize a portion of retail clients’ portfolios to reflect their unique investment objectives. SMAs provide individual investors with exposure to asset classes and opportunities that are difficult to achieve through a plain vanilla mutual fund.
On the ICE Bonds platforms specifically, we have seen SMAs emerge as a vital source of liquidity in municipal bond markets, and these accounts are increasingly playing the same role in corporate bonds.
In addition to SMAs, fixed income ETFs have also become a notable source of corporate bond liquidity in the secondary market due to the ETF share create/redeem process which requires vast sums of odd lot or micro lot bonds being transacted daily.
Figure 1. U.S. corporate bonds, trade count by lot size (USD par notional value), 2022-2024
Sources: ICE, TRACE, EMMA
As Figure 1 demonstrates, U.S. corporate bond trade counts grew from 22.7 million in 2022 to 32.3 million in 2024. Transaction volume grew fastest in trades below $100,000, from an already commanding 66.5% of all bonds traded in 2022 to reach 68.5% in 2024.
Trade counts leapt as rising interest rates reignited investor appetite for corporate bonds. Institutional investors began reengaging with the asset class, as did wealth managers who allocated client money through vehicles like SMAs, while individual investors took exposure through ETFs in self-directed investment accounts. Despite sharing a renewed enthusiasm for the asset class, however, institutions, wealth managers and individuals differ markedly in how they trade corporate bonds.
Retail investors almost exclusively execute electronic orders onscreen with a simple click of a button. Whether they’re looking to trade bonds directly, or via a mutual fund or ETF, retail participants use the method known as price-based click-to-trade.
Institutional investors and wealth managers operate very differently. Rather than clicking a price on a screen, professional traders execute on the basis of a credit spread. A corporate bond trader issues a request for quote (RFQ) to a group of market makers, soliciting bids and offers on a bond - with all the attendant information leakage that comes with broadcasting intent to buy or sell. When the bids and offers come back, they are expressed not as a price, but as the spread between the yield on a benchmark U.S. Treasury security and the corporate bond of the same maturity.
In a simple example, if the yield on the 10-year U.S. Treasury is 4% but the yield on the 10-year investment grade corporate bond a trader is seeking is 4.1%, the 10-basis point spread between the two is what the trader is quoted.
Trading bonds on spread is the default institutional price discovery method because the credit spread represents a static expression of relative value, issuer creditworthiness and risk. The price for U.S. Treasurys ticks up and down constantly throughout the day, meaning that any price-denominated quote is almost instantaneously out-of-date. When a market maker provides a spread-based quote, however, that provides the buyer a means to distill the risk the market is currently pricing into an investment grade corporate bond relative to the risk-free rate represented by the U.S. Treasury of the same maturity, absent all other market noise.
Introducing spread-based click-to-trade
Different trading protocols for individual investors relative to wealth managers and institutional investors did not present an issue in the past since these worlds operated almost entirely independent of one another. Now, however, these two worlds are colliding as SMAs and ETFs come to represent bigger sources of liquidity, trade counts soar, ticket sizes get smaller, and lots become more irregular.
In short, the institutional investor, wealth manager and retail investor are today executing in the same liquidity pool. This shift necessitates new execution methods that unite the ease of transacting at the click of a button, with long-established institutional bond trading infrastructure that relies on spread-based bond quotes.
This is why ICE Bonds is implementing new spread-based click-to-trade functionality in corporate bonds. Supplementing their longstanding access to price-based quotes on ICE TMC, ICE Bonds' clients will now also have the ability to click-to-trade on spread-based orders for corporate credit.
This enhancement follows the broad institutional adoption of spread-based click-to-trade functionality in ICE Bonds’ municipal securities liquidity pool. Institutional clients have communicated their strong desire for the same functionality to be made available in corporate bonds on ICE TMC, and ICE Bonds is responding to that client demand.
The addition of spread-based click-to-trade opens the door for more institutional users to benefit from the ICE Bonds offering, including fixed income desks operating trading systems specifically configured to execute against bids and offers expressed as spreads.
Furthermore, as U.S. fixed income continues to trend toward smaller ticket sizes transacted in higher volume, preventing information leakage becomes ever more imperative. Spread-based click-to-trade provides an alternative to soliciting quotes from liquidity providers and may give ICE Bonds' clients greater trade certainly in light of higher order fill rates, while also executing confidentially given the anonymous nature of the platform. This also extends beyond execution to clearing and settlement since the ICE TMC platform transacts in a riskless principal capacity, with ICE Bonds acting as the counterparty to each leg of a trade effected on the ICE TMC platform.
Click-to-trade may also yield practical benefits, enabling fixed income desks to focus their traders’ time and expertise on the most high-value high-touch trades, while directing their smaller and odd lot activity to the ICE Bonds' liquidity pool, where orders can be executed systematically, potentially reducing headcount and operational costs.
The increasing client demand for the broader availability of this functionality has been demonstrated on ICE TMC, in which participants have already become accustomed to click-to-trade execution. The extension of the trading protocol to the corporate bond market represents another instance of ICE listening to the needs of clients and developing the capabilities they need to manage risk, transact seamlessly and serve their stakeholders more efficiently.
Disclaimer
Trading and execution services are offered through ICE Bonds Securities Corporation or ICE Bonds, member FINRA, MSRB and SIPC. The information found herein, has been prepared solely for informational purposes and should not be considered investment advice, is neither an offer to sell nor a solicitation of an offer to buy any financial product(s), is intended for institutional customers only and is not intended for retail customer use.