Bond traders are right to be worried about artificial intelligence, it’s coming for their job — but only some of it, and not all at once.
While AI agents could be trading bonds at Wall Street banks within a couple of years, experienced humans will still need to be “in the loop” to prevent their digital colleagues from going haywire, according to Michael Roberts, who heads corporate and institutional banking at HSBC Holdings Plc. Memories are still fresh about how bond bots fell short during periods of market unrest. They’re getting better now, and meanwhile hiring managers are adding AI-native junior traders and more quants to help run them, market participants said.
“Based on all the conversations that we’ve had with clients, everybody’s preparing for this,” said Zornitsa Todorova, who leads thematic fixed-income currency and commodities research at Barclays, referring to AI bots executing more trades. “It’s a slow burner, but it’s definitely going to happen.”
The stakes are huge for the US corporate bond market, where $62 billion of securities change hands on a typical day, according to data from Crisil Coalition Greenwich. Ultimately, Barclays estimates, this could push up electronic trading of US investment-grade bonds to 65% of volume in coming years from 45% currently, with high-yield debt trades doubling to 50%.
For now, early adopters are mostly using AI agents for information gathering, analyzing data or complex covenants and distilling news headlines to help make pre-trade calls, according to market participants. AI agents can also help build screening and visualization tools and for automating internal tasks.
Tradeweb Markets Inc., an electronic-trading marketplace that counts more than 3,000 clients in 85 countries, is getting “a ton of interest” from clients looking for AI assistance, said Izzy Conlin, head of strategy and solutions for global markets at Tradeweb. This includes pre-trade and post-trade analysis, helping traders compare costs across different protocols, recommending dealers for specific trades or suggesting bonds to include in a portfolio trade.
Tradeweb, already the No. 1 e-trading platform for US corporate bonds, is betting on more volume by purchasing No. 3 Trumid Holdings for about $1.97 billion. Even so, “I still don’t see a world where you don’t have human traders,” Conlin said in an interview. “If you try and change what dealers and investors have done over 10 years really quickly, it doesn’t work.”
Electronic trading venues are driving AI adoption by embedding it into the user interfaces and workflows. In June, LTX added agentic capabilities to its BondGPT application. Dubbed “Agentic BondGPT,” the tool can take predefined actions like creating trade tickets or even launching trades on behalf of human traders.
An AI agent can also alert humans to opportunities in obscure corners of the credit market by sorting out price discrepancies or hidden value in the byzantine paperwork of distressed companies whose debts have been restructured.
Right now, the average spread on the riskiest US corporate bonds — notes rated CCC — has been more than 1,000 basis points since late September, a level that typically implies high probability of default, restructuring or loss. Credit investors and traders are asking Agentic BondGPT to, for example, alert them when a CCC bond trades more than 50 basis points wide from its prior day close.
Other prompts include flagging junk bonds trading one point higher or lower than the previous day or populating a trade ticket when there’s an offer that’s $5 million-plus on a 10-year industrial bond rated at least BBB with a spread of 85 basis points or wider.
“AI agents are no different to hiring a human trading assistant on the desk,” said LTX Chief Executive Officer Jim Kwiatkowski.
Compliance Rules
Traders agree that such AI tools are a huge time saver, allowing them to perform several days worth of tasks into a few hours. Still, the output needs to be double-checked, and humans for the most part aren’t trusting AI to execute trades. In some cases, traders say, compliance rules bar them from using AI agents altogether.
One theoretical risk is that as more AI agents increasingly react to the same data and market signals, they could all act the same way simultaneously and trigger “episodic volatility,” according to Barclays — in other words, a convulsion that shakes a broad swath of the market. For example, if multiple AI models all detect worsening credit conditions for an issuer, they may all attempt to cut exposure at the same time, resulting in a wave of sell orders that could amplify price moves if humans don’t intervene.
“We view it as a tool that augments human decision-making rather than replaces it,” said John Lloyd, global head of multisector and corporate credit at Janus Henderson.
This report is auto generated from the Bloomberg news service. ThePrint holds no responsibility for its content.