The grey market exists for one purpose – for bonds to trade in the hours between the announcement of a new issue, and its subsequent pricing and allocation. Asset managers may want to trade during this period if they have a strong view on the issue or have concerns about allocation. However, grey market trading has historically been a manual process in an over-the-counter market, and if the record European bond issuance we have experienced this year has taught us anything, it is the need to increase efficiency by making this process electronic.

David Everson, head of fixed income trading, EMEA at Liquidnet, said: “The grey market can be an extremely fast-moving market as sentiment changes on the back of information about pricing, allocations, and market conditions. This, paired with the lack of identifier needed to trade electronically, is why it has traditionally been so difficult to move trading to a screen.”

In September 2021, Liquidnet introduced its New Issue Trading (NIT) protocol — the first electronic solution to trade new issues in Europe. The protocol was launched alongside Liquidnet’s platform for real-time, new issue announcements (NIA) to help the industry progress towards electronifying the full life cycle of a bond.

Jonathan Gray, head of primary markets at Liquidnet, said: “The buy side wants to be able to communicate primary orders for a new issue electronically directly from their order/execution management system (OMS) to the bank syndicate, and also to be able to trade electronically in the grey market and immediately post-pricing.”

Gray explained that Liquidnet’s 30+ partner banks send new issue announcements with the key terms of the deal and Liquidnet partners with Bloomberg who provide the pre ISIN identifier, FIGI. This data is published on the firm’s New Issue dashboard.

“Having a recognised identifier for a new issue allows clients to create the security in their OMS earlier in the process which can then be used for its intended purpose such as ticket building, compliance checks and audit trails,” continued Gray. “The added benefit is the bond can also be traded in the grey market electronically.”

“Traditionally, grey markets have been traded voice or via IB chats. With the introduction of electronic solutions, we are able to offer a ‘click-to-trade’, anonymous order book with firm pricing,” said Everson. “Centralising liquidity brings transparency and reduces execution costs. As adoption increases, we’re seeing increased volumes.”

Liquidnet NIT’s active user base has grown on average 44% quarter-on-quarter since launch according to Everson. “With record European issuance this year, our traded volumes are on track to rise by approximately 200%*,” he said. “Adoption has also grown further by integrating Liquidnet’s protocol into TP ICAP’s electronic platform, Fusion. This enables TP ICAP’s sell side dealer community to access the order book which is increasingly becoming the central source of liquidity for those market participants wanting to trade in the grey.”

Gray said putting US dollar issues on the screen and expanding geographically will be the next step following the success of the European offering.

*Volume traded data compares Q2-Q3 2022 with Q4 2022-Q1 2023, data is projected to the end of Q1 using ytd ADV (average daily volume)

Bringing the Grey Market to the 21st Century