Fixed Income Perspectives - The Market Was Liquid Until It Wasn't

Liquidity in bonds is being rewired. The winners are already adapting:

• Non-bank players are using scalable tech and equity-style risk models to take share.
• Venues are centralizing onboarding and connectivity, changing how liquidity is accessed.
• Traders at non-top tier banks and investment firms face a choice: invest in automation or risk being left behind.

Banks under constraint

For decades, banks were the backbone of European bond markets. Dealers held inventory, absorbed client flows, and managed risk. They were the shock absorbers of the system. That world is fading.

The reason is not mysterious. Regulation has made it uneconomic for banks to carry the same balance sheets they once did. Basel III, with its endless revisions, is a capital tax on liquidity. Even after the European Commission postponed the Fundamental Review of the Trading Book implementation to 2026, the trajectory is clear. Risk.net estimates that the Basel output floor could cut CET1 ratios by around 70 basis points and add more than €500 billion in RWAs in a downturn. The 2025 EU-wide stress test shows that banks remain resilient, aggregate CET1 depletion was about 3.7 percentage points, markedly less than in 2023. So, while they appear robust, resilience is not the same as generosity. Capital is scarce, and scarce capital means selective risk-taking.

Banks no longer want to be the warehouse of last resort. They are perfectly willing to step aside when the balance sheet is too expensive. This is not a question of willpower. It is arithmetic. A dealer who is penalized heavily by regulators for holding corporate bonds cannot act like it was 2005.

That gap in balance sheet capacity has created space for others. Non-bank financial institutions do not carry Basel capital rules on their shoulders. They are faster, less burdened by compliance bureaucracy, and able to deploy models that banks struggle to replicate. In many cases they are not just filling the void, they are reshaping the way liquidity works.

The bottom line is that the old assumption that banks would always stand in the middle and make markets whole no longer holds. Liquidity is now conditional. It depends on:

• balance sheet appetite,
• regulation,
• technology stack,
• client and counterparty relationship management, and
• the ability to offset risk in an expeditious fashion.

The new players stepping into this vacuum are not doing it out of charity. They see an opportunity created by the very constraints that keep banks on the treadmill with a weighted vest.

ETF-native firms as bond dealers

The rise of ETFs did more than provide investors with the ability to access beta inexpensively. It created a class of firms that learned to operate in a world where liquidity was manufactured, not guaranteed. These firms live and breathe automation. They thrive on cross-hedging across ETFs, futures, and indices. They are not afraid to warehouse risk, provided they can move it quickly through correlated markets. That DNA is now embedded in European bond trading.

Firms such as Jane Street, Virtu, Citadel, and Flow Traders are no longer niche players. They are on the same venue lists as the global banks. Their edge is not a secret: they run tight, model-driven pricing, rely on lightning-fast hedging, and are not weighed down by Basel capital rules. The result is that, on electronic protocols, they often look sharper and more reliable than the traditional dealers.

This is not theory. The numbers tell the story. Tradeweb and MarketAxess both report record volumes in portfolio trading. Portfolio trades are ones where these firms had dipped their toes. Some banks still wrestle with not only how to price and hedge twenty or thirty lines at once but also having the plumbing in place to do so. ETF-native firms treat it as business as usual. They have the systems, the connectivity, and the stomach for risk transfer.

Jane Street even tapped the bond market itself this spring, issuing a $1.35 billion deal rated BB. That is not the move of a bit player. It is the move of a firm intent on building resiliency in the face of uncertain landscape in the fixed income universe. Virtu, for its part, is expanding its agency model, aggregating prices across brokers and streaming them back into client workflows. Flow Traders publishes openly about how ETF and bond liquidity feed each other, and then quietly acts on it every day.

Many banks experience difficulties keeping up with this level of automation. Their technology budgets are stretched thin, their compliance overhead is heavy, and their traders are pulled between quoting axes and endless reporting. Non-banks have stepped into that vacuum with models built for scale. This is why when you ask clients who consistently shows up on their screens with competitive prices, they mention the same few non-bank names again and again rubbing shoulders with the global investment bank titans

None of this means banks are irrelevant. They still own the primary market, they still dominate corporate relationships, and they still provide the bespoke solutions that cannot be coded into an algorithm. Yet the secondary market is changing shape. Liquidity no longer lives solely on dealer balance sheets. It flows through an ecosystem where nimble, ETF-native players are setting the pace, and in many cases forcing the banks to play catch-up.

A2A (All-to-all) as liquidity highways

The European bond market has always been about connections: who has lines with whom, how fast you can get a price, and whether the other side will stand by it. That dynamic is changing. Multilateral Trading Facilities (MTFs), through protocols like MarketAxess Open Trading and Tradeweb AllTrade, have rewritten the rulebook by taking on a role that used to belong to banks.

On these venues, the operator’s affiliate, in the case of MarketAxess, MarketAxess Capital Limited (MACL), steps in as matched principal. In plain English, the venue interposes itself as counterparty, allowing two participants to transact without ever needing a direct bilateral relationship. Investors onboard once to the MTF and gain access to a broad pool of liquidity, while the venue assumes responsibility for KYC and settlement.

This matters because onboarding remains one of the most expensive and time-consuming aspects of fixed income. Every new line means more legal documentation, more compliance checks, and more operational overhead. MTFs are effectively saying: let us shoulder that burden, you just trade.

The costs are significant, however. Maintaining lines and KYC is expensive, and venues must make commercial decisions about how much to absorb:

• Large asset managers often find these costs waived.
• Mid-tier clients are encouraged to maintain activity
• Inactive accounts are at risk of being put into “sleep mode.”
• Regional niche brokers may even be charged fees until they reach a certain trading threshold.

Finding the right commercial balance is important as client behavior and dynamics often change during the course of a year. There may be a flurry of activity in Q1 due to yearly inflows, which may peter out again by Q3. The relationship managers at the venues must be aware of these trends and be able to communicate them internally to their managers when discussing fees expectation and distribution on both a quarterly and yearly basis.

As listed companies, both Tradeweb and MarketAxess face competitive and shareholder pressures. Each seeks to be seen as leading on the next innovation, from portfolio trading to data services. This competition spurs innovation, but it also puts strain on R&D budgets and lengthens decision cycles in ways that do not always align with front-office needs.

Despite the frenzy, the pitch remains compelling. All-to-all trading allows desks under cost pressure to access liquidity without the burden of dozens of bilateral agreements. The model is often questioned: Can venues sustain themselves while competing on fees and absorbing legal risk as counterparties? Yet record volumes tell their own story. Portfolio trading and all-to-all flows are now among the fastest growing segments.

The evolution over the past decade has been striking. These A2A platforms are not neutral pipes. They are active cogs of market infrastructure, centralizing risk and operational responsibility in ways that used to sit across dozens of bilateral dealer–client relationships. That concentration delivers efficiency, but it also creates dependency. When you trade through an MTF, you are betting on its stability as much as the price on your screen.

Traders I speak with often come back to the same point: efficiency is welcome, but trust is everything. Venues can streamline onboarding and reporting, but in the end, liquidity is only real if someone shows up when it matters. The venues provide the platform, but the essence of bond trading remains the same: liquidity depends on human judgement and balance sheet appetite.

Buy-side as liquidity providers

The idea that investors are only price takers in the bond market is outdated. Buy-side firms are increasingly stepping into the role of liquidity provider, whether regulators like it or not.

All-to-all protocols make it explicit. On MarketAxess Open Trading, trades are executed “between and among” investors and dealers. That means an asset manager can respond to a request for quote anonymously and effectively act as a market maker. Tradeweb’s AllTrade pools liquidity from both dealers and investors on the same screen. If you have the bonds and the appetite, you can provide liquidity.

Large asset owners also mobilize balance sheets in other ways. Norges Bank Investment Management, which runs the Norwegian oil fund, discloses that it lends both equities and bonds through its securities lending program.

That is real bond inventory flowing back into the market when banks or other participants need it. Most large managers publish similar disclosures under EU reporting rules, showing how their holdings are used to keep markets moving.

Repo is another frontier. Clearing houses such as LCH and Eurex now offer direct or sponsored access for buy-side firms. Pension funds, insurers, and asset managers can provide collateral directly into the system, with a sponsor bank standing behind them. The effect is that non-banks are now part of the core funding and collateral plumbing that used to be dealer territory.

A Managing Director for trading at a large European bank told me that "credit repo is time-consuming and not always profitable. Each lifecycle event is costly and inefficient, so the only lever is to cut cost." It is a reminder that the economics of market plumbing are not always aligned with the headline story of efficiency.

Regulators are watching closely. Both ESMA and the ECB note that non-bank liquidity provision adds resilience but also carries risks. Non-banks are not bound by Basel capital rules, and in stress events liquidity mismatches and margin calls can create knock-on effects. The official reports make it clear: the system benefits from more players providing liquidity, but it may also be importing fragility from areas that are less tightly supervised.

The strains also show up in human terms. Larger asset managers are constantly pulled by the sell-side for two minutes of their time. As a Head of Credit Portfolio Management at a large Nordic asset manager told me: “If I answered every call, mail, and IB [instant Bloomberg] I receive, I’d never be able to do what I’m paid to do: manage institutional money. Everyone is crying wolf, but my duty is to our investors, not a sales guy looking to cover a short for his trader.”

Not all participants want to transact through electronic protocols. Some still prefer the phone, whether out of trust, discretion, or habit. The coexistence of both models is a reminder that technology can streamline, but it cannot replace the human judgment that underpins liquidity. Midsize banks, family offices, and hedge funds often lack the infrastructure to route orders beyond launching an RFQ, sending a Bloomberg IB, or, more commonly, picking up the phone. It is not unwillingness to modernize; it is the simple fact that time, resources, and attention are scarce, and desks cannot spare them for building new workflows.

Buy-side liquidity is here to stay. It is not just an experiment on a handful of platforms. It is securities lending programs, repo participation, and direct trading flows. It works in good times, but it is untested in a full-blown crisis. The next real stress event will show whether investors are willing to keep providing liquidity when the screens go red. As the old line goes: the market was liquid, until it wasn’t.

The real question is what this patchwork means for the structure of the market. Banks, venues, non-banks, and investors are all playing roles that once had clear boundaries but now overlap. The plumbing works, but it is more complex, more interconnected, and arguably more fragile. That complexity sets the stage for the broader implications we need to face.

Implications for market structure

Why are these new liquidity providers successful? What makes them rise above the pack?

• Technical prowess,
• Leadership willing to take risks,
• Lessons learned from equities and the past, and, most importantly,
• The ability to listen to clients, understand them, and eventually anticipate them

Firms with captive trade data on their platforms do not need to overspend on external feeds. The flows at a MarketAxess of Norges Bank IM are enormous. They build scalable systems, resilient infrastructure, and risk models sharpened from their equity trading roots. This is not a simple copy-and-paste job. They have built technology to fit the quirks of fixed income: fragmented liquidity, bilateral workflows, and the need for smarter automation.

Venue consolidation has followed. Non-organic growth through mergers and bolt-on acquisitions has become a way to gain scale and stay competitive in a market where efficiency and cost-focus are everything.

So, what do markets leaders at the banks say?

Many fall back on regulation and balance sheet pressure as excuses. The reality is simpler: without nimble and automated technology they are chasing liquidity that has already moved. Pricing is the sharp edge. A trader asked to quote on a hundred bonds cannot survive by copy-and-paste from Excel.

This is where leadership, not managerial, skills matter. Listed banks live under quarterly pressure to defend cost–income ratios, headcount, and IT allocations. That often leaves the top brass at the mercy of a constant spray of regulatory acronyms coming in over the prow and project priorities. Limited resources make it hard to keep pace, even when the e-trading desk should clearly be the one handling the job. A French govie trader told me last week about a conversation he had with an internal IT desk in Q4 last year. The response to a query to help with some digital piping? “We are focused on DORA now. We don’t have time to build a connection to Bloomberg. Can’t they [Bloomberg] do it for you? We pay them enough! Ha ha!” He was forced to plead with a separate IT group, since the e-trading developers had been reassigned elsewhere. Quel bordel !

Another frustration across front office desks, both buy- and sell-sides, is that on occasion an incompetent manager gets parachuted into a chair in the corner office with no clue about fixed income. Too often managers assume algo trading in bonds is just a cut-and-paste of equities. They find themselves at the base of a steep learning curve, a path many managers who have made it to the corner office have no desire to climb. In some houses, promotions are tied more closely to which school the person attended than to merit. This doesn’t mean that the manager is stupid by any means, but connections and politics sometimes outweigh market competence. If a digital investment is successful, the manager will take the laurels. If it fails, the traders are thrown to the lions.

For regional and mid-sized banks, the priority is often primary market fees rather than secondary trading, leaving local clients underserved; local clients who prefer domestic coverage and not just being a number at the Tier 1 houses. Unless managers commit to glad-handing the clientele and building competitive and scalable electronic trading services that reflect the realities of fixed income, they should stop wasting time, fire the desks, and outsource the whole thing. For many institutions that would be political suicide, but the choice is there.

Back to Trading

Technology should not turn traders into data clerks. The firms that adapt must free their people to focus on markets and clients, not on feeding systems.

Bond market liquidity in Europe is no longer the simple story we grew up with. It used to be banks that held the inventory, took the risk, and quoted the market. Now liquidity is stitched together from a patchwork of non-bank dealers, agency aggregators, and even the buy side itself. Efficiency has improved, but the system feels less predictable.

There are benefits. More players mean deeper pools of liquidity [in theory]. Automation reduces friction and makes audit trails cleaner. Some venues take on the drudgery of onboarding, freeing traders from a mountain of bilateral paperwork. These are not trivial gains. They let trading desks focus on complex risk transfer rather than chasing signatures and legal opinions.

Yet efficiency does not erase human behavior. Relationships still matter. Trust still matters. Markets are not machines. Every trader knows that the moment of truth comes when liquidity disappears, not when it is abundant. Screens can look deep until you try to hit them.

The shift also brings new vulnerabilities. Concentrating onboarding and settlement in a few venues creates single points of dependency. Allowing non-banks to warehouse risk adds diversity, but it also moves part of the stability burden into less regulated corners. Letting investors act as liquidity providers broadens the market, but it blurs the line between client and dealer in ways that supervisors will eventually have to address.

The regulatory response will be telling. The new Designated Publication Entity (DPE) regime and consolidated tape will add transparency, which is welcome. They will also show, perhaps uncomfortably, how much of today’s liquidity is already provided outside the traditional banking model.

So - what does this all mean? It means we have a bond market that is more electronic, more interconnected, and more efficient than ever. It also means we have a system where resilience depends on a wider set of players who are not bound by the same rules as banks. Some see that as progress, others as a source of fragility. Personally, I see it as both.

The best generals never march their armies into open battle. They unsettle the enemy before swords are drawn. Trading is no different. The winner is not the cowboy waving a six-shooter in the street, it is the quiet hand that placed the trade while everyone else was still lacing their boots.

Western films gave us the image of men squaring off on Main Street, hands hovering over holsters, waiting to see who draws first. In reality, the smartest player was never there to begin with. He had already struck at the right moment, at the right price, and walked away before the dust rose. As Sun Tzu put it: “The supreme art of war is to subdue the enemy without fighting”.

That is the essence of liquidity. It is less about making a grand show of standing your ground, more about expecting where the next stress will appear, and being positioned before the crowd arrives. In the current environment markets, unlike politics, tend to reward foresight, not theatrics. The quiet trader who sees the clash coming does not need to duel at all.

Brett Chappell 2025