JP Morgan is investing heavily to make up ground in electronic trading of corporate bonds, an area where it has lagged rivals, in the latest confirmation of the pivotal role that technology now plays in the once human-dominated credit markets.
The US’s largest bank has long maintained top rankings in underwriting companies’ debt offerings and trading those securities in secondary markets. But it has fallen behind the likes of Goldman Sachs, Morgan Stanley and Jane Street in electronic trading of corporate credit, which has grown significantly in recent years.
JP Morgan is seeking to rectify this by building on a series of investments it has made over the past two years, including its use of algorithms to price bonds and making a push in fixed-income exchange-traded funds, as it looks to become one of the top dealers in credit e-trading on a consistent basis.
“We want to establish a leading position in e-trading to complement our wider credit franchise,” said Chi Nzelu, JP Morgan's head of FICC e-trading. “We understand that requires continued investment in technology as well as leveraging all of our resources across trading, sales and our client relationships.”
The shift towards a more equity-like trading paradigm in bonds has accelerated sharply over the past five years, sparking a technological arms race among dealers to capture client flows. US corporate bond e-trading volumes have nearly tripled over the past five years to an average of US$19bn per day in May, according to data provider Coalition Greenwich, while non-electronic volumes only increased 8%.
E-trading now accounts for 44% of all US corporate bond trading, up from 23% in 2019. That growth has driven a roughly 50% increase in trading volumes across the wider market, where US$43bn of securities changed hands daily in May. Those numbers underline how expertise in electronic trading has become crucial for any dealer with serious ambitions in corporate credit.
“There has been a rapid electronification in credit, which is similar to what we’ve seen in other asset classes,” Nzelu said. “Electronic trading reduces friction. Once you put a price on a screen and make it super easy for people to access, then more people will try to trade.”
Playing catch-up
This isn’t the first time that JP Morgan has had to play catch-up after rivals used technology to steal a march. Chase, which merged with JP Morgan in 2000, was one of the top foreign exchange trading firms in the late 1990s, but its market share began to crater after it resisted electronification. It took around 10 years of heavy investment in FX e-trading from the mid-2000s for JP Morgan to regain its place as one of the top dealers.
“Our approach includes learning from the past,” said Nzelu, who helped spearhead the FX overhaul. “We think there are more similarities across asset classes than differences.”
JP Morgan has been investing across the main pillars that underpin the new world of credit e-trading, including algorithms to price smaller odd lots of bonds and portfolio trades, through which dealers price chunky lists of securities in one go.
Improving response times for pricing requests on smaller ticket sizes has been an important focus as client behaviour has evolved, with many now expecting quotes to arrive within seconds. Those who can’t demonstrate proficiency on these bite-size trades risk not getting the opportunity to compete on larger and more profitable transactions.
“Expectations are changing. The leaders in this space need to be able to turn around quotes almost instantly, and that requires internal, automated efficiency,” Nzelu said. “It's incredibly difficult to argue for client business on sizeable transactions if you can’t execute well on smaller tickets.”
ETF investments
JP Morgan’s decision to ramp up its investments in fixed-income ETFs, an area where banks haven't historically had a large presence, shows how ETFs have emerged as a crucial outlet for dealers looking to recycle credit risk – as well as a product clients increasingly want to trade in its own right.
Non-bank market-makers Jane Street and Flow Traders have established an estimated 80% market share in fixed-income ETF trading as of last year – a dominance that has helped Jane Street build a formidable position in overall credit e-trading.
Nzelu said he didn’t have any broad concerns about the competition coming from tech-savvy non-bank market-makers, highlighting the significant technology budget that JP Morgan possesses – US$17bn in 2024.
“We feel we have all the pieces we need in terms of human resources, technology spend and client relationships to build this incrementally,” said Nzelu. “We’re not underestimating the continued investment it requires but we don’t see any structural limitations to our growth.”
The human factor
It’s not just beating the competition that banks must address. The e-trading revolution will inevitably disrupt the practices of their cohorts of human traders and salespeople, who may be sceptical of change – and concerned about exactly where they’ll sit in this new world.
But there are some repetitive tasks that naturally suit algorithms, like responding quickly to requests for quotes or pricing smaller tickets that traders ordinarily might not have time to deal with. The eventual aim is for algorithms to underpin all credit trading activity at banks like JP Morgan, while giving human traders the ability to intervene when it comes to managing larger risks.
"Machines are not going to be as profitable as a trader because they won’t be able to capture all the information asymmetries in a market,” Nzelu said. “We need to continue to find ways we can leverage trader and salespeople expertise and show them how they can benefit from the algo as a utility that will help them with price discovery, analytics and understanding clients.”
He draws on the example of FX markets, in which more than 90% of volumes are now electronic in major currency pairs.
“The FX market is highly electronic and we will continue to have traders adding value there while maximising the use of the algo – [traders are] just much more effective than they used to be because of the tools they now have,” he said.
