Supporting better outcomes for small bond trades
How ICE’s proprietary technology and liquidity help advance U.S. municipal trading
Published
September 2024
Authors
Senior Director, Product Management, ICE
Introduction
Historically, the fixed income market has been the domain of institutional players, trading large blocks of bonds with scant transparency. With this came a need to protect from information leakage, which meant relying on trust fostered between the asset management and dealer community tasked with sourcing the bonds. Everything revolved around getting “an order” which would allow the trader to create a market (an offer to buy or sell a bond at a specified bid price and ask price) to get involved (axed) to help generate “flow” (trading). Having a sizeable buyer or seller would create that opportunity. Size matters, so when a dealer could put out a 5 million-up or better yet, a 10 million-up market (signifying they would buy 10M or sell 10M at the bid and ask that they were presenting, respectively) meant the difference between being a legitimate market maker and liquidity provider or not. The dealer community had large teams of salespeople who were responsible for getting an order that could be used to help get the trader going. The rise of electronic trading and availability of sophisticated data has underpinned a transition from this market structure in fixed income. The shift is most noticeable when we look at various trading trends.
Data & analytics
Analyzing trade count by trade size or calculating market implied bid/ask spreads on trade activity are two important ways to gain an understanding of how fixed income trading has evolved for U.S. corporates and U.S. municipals.
We start with a basic illustration of trade counts across different trade sizes for corporate bonds:
US Corps: trade count by trade size (USD par notional)
Source: ICE, TRACE and EMMA
US Municipals: trade count by trade size
While the volume of institutional-sized transactions has remained stable over the past few years, smaller trades have risen dramatically.
When examining these trading trends, we can look more closely at market implied bid/ask spreads and analyze the impact on trading costs. ICE calculates costs with Transaction Cost Analysis, or TCA, for fixed income. We see a clear trend in TCA with a more dramatic impact on smaller trade activity:
USIG 10yr. Corp, 50th percentile TCA
This trend is not just happening in corporates, we also see it in municipal securities:
US Tax Exempt GO, 5yr.+ IG, 50th Percentile TCA
US, Tax-Exempt Rev, 5yr. + IG, 50th Percentile TCA
As a result of this compression in market implied bid/ask spreads we dig deeper to understand the transaction cost impact - as seen below, investors are clearly benefiting from these trends:
| Asset type | 2016 Micro | 2016 Odd | 2023 Micro | 2023 Odd | Micro Diff | Odd Diff | Micro % | Odd % |
|---|---|---|---|---|---|---|---|---|
| US Tax-Exempt GO IG TCA | 0.984 | 0.397 | 0.528 | 0.326 | -0.456 | -0.070 | -46% | -18% |
| US Tax-Exempt Rev IG TCA | 1.215 | 0.511 | 0.647 | 0.363 | -0.568 | -0.148 | -47% | -29% |
Source: ICE
To what can we attribute these trends? As expressed in our Size Adjusted Pricing Whitepaper there are a variety of factors including advances in data, transparency, and technology as well as the growth of ETFs, Separately Managed Accounts, rising rates, and the electronification of fixed income trading. ICE’s Size-Adjusted Pricing (SAP) is intended to be used by clients to help value fixed income transactions and/or holdings that are smaller than the institutional round lot position represented by ICE’s fixed income evaluations (typically 1MM or greater current face USD or local currency equivalent). SAP’s utility covers a wide range of applications across the front, middle and back offices including trading, oversight and indicative values.
In this paper we dive deeper into key dynamics around ICE Bonds’ electronic trading platforms, and specifically, we will look at some recent trends taking shape on the ICE TMC alternative trading system (“ATS”) operated by ICE Bonds.
As mentioned, electronic fixed income trading is a clear catalyst to more efficient markets. As an operator of two (2) fixed income ATSs, ICE Bonds sits at the center of a mature market trend which does not appear to be slowing.
Trading venue analysis
When focusing our analysis on the ICE TMC ATS, it’s not hard to see how municipal trade activity has shifted over the last few years. We will focus on a few key elements:
- Trade Counts
- Institutional Trade Volumes
- Instrument Counts
- Daily Offerings
Electronic trading is here to stay and growing, but we will also review the drivers of more recent trends. In general, fixed income markets have seen advancements in overall transparency. For example, ICE Data Services has seen growth in the consumption of municipal bond pricing, specifically Continuous Evaluated Pricing (CEP) for municipals. The ICE Municipal AAA Yield Curve is another advancement within the muni market. The curve updates intraday and provides a transaction-driven representation of municipal price movement and activity. By taking ICE’s prior end-of-day (EOD) evaluation and combining it with our current EOD evaluation, CEP offers transparency into the price between the EOD price points. When you pair these data elements with new market participants entering the space, it creates momentum for electronic trading. The new, non-bank liquidity providers on electronic venues appear to be using a more data-driven approach to market making. For investors, there appear to be clear benefits, as the new liquidity providers can better reflect institutional size market making on trade sizes which are smaller than traditional lots.
The growing participation from various market participants is evident when examining ICE Bonds trade activity. For example, when we look at trade counts and institutional type trading activity on ICE TMC from 2021 to present day we see a dramatic increase in volume:
ICE Bonds municipal trade count
ICE Bonds municipal trade volume
Source: ICE
These trends are supported across a wide range of market participants and the market appears to be more open to trading a wider range of assets electronically. ICE TMC currently has over 500+ liquidity providers actively providing liquidity. Here we see another dramatic increase in daily offerings and unique CUSIPs.
ICE Bonds municipal cusip counts & daily offerings
Source: ICE Bonds
Over 125,000 average daily CUSIPs offered
The trends are clear and underscore the ability of alternative liquidity providers to create higher quality markets across a range of instruments by employing a more data-driven approach.
Conclusion
ICE Bonds’ combination of proprietary technology and expertise put it in a strong position to help clients manage their fixed income order flow. In an asset class where liquidity can still be scant, our electronic trading platforms offer wide liquidity coverage including U.S. corporates, Certificate of Deposits, Treasuries and U.S. municipals.
To help further enhance price discovery, ICE Data Services provides intraday evaluated pricing through its CEP offering and trading analytics like continuous market depth indicators, best execution service, and transaction cost analysis.
Bringing together a broad range of participants and platforms, such as the ICE Bonds electronic trading platforms (i.e. ATSs) we are helping to advance fixed income markets by boosting liquidity and enhancing price discovery. This advancement embodies ICE’s overarching mission of bringing transparency and efficiency to global markets by converting them from analog to digital - creating broader access for all participants.
Limitations
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Resources
ICE Bonds - Key stats
- Over 3,300 Municipal Trades per day for 215MM in notional
- Average Monthly executed is $4.3 billion with a 99% fill rate
- 500+ liquidity providers
- Over 10,000 Bids Wanted submitted daily
- Unique Bids Wanted- daily average 775 for 65MM in notional
- Institutional Bids Wanted 100K+: Daily average 1000 bids wanted for 500MM notional
- Average institutional trade size 125M
- 79% of volume is 1-500M