This is a contributed article from Andrew Howieson, an advisor to FactEntry.
Corporate bond markets are inherently illiquid
There is now wide recognition that corporate debt markets lack sufficient liquidity to meet investor trading requirements. Blackrock’s September 2014 paper Corporate Bond Market Structure: The Time for Reform is Now described the trading market structure as “broken”. The withdrawal of dealer capital, driven by Basel III and Dodd-Frank regulation (leading to a reduction in corporate bond inventory from $250 mm to $60 mm in 2014) is broadly cited as the cause of dwindling liquidity. Market followers with longer memories may recall that buy-side concern over market liquidity and transaction costs pre-dates Basel III and was the driver of a generally brief but extensive flourishing of electronic trading “solutions” around 2000. It is not unreasonable to suggest the corporate bond markets are inherently illiquid and were only made partially and temporarily liquid through the application of dealer capital, at a price.