Systematic Credit: A New Frontier

Today, around 60% of all credit market participants use some form of automated execution, up from 40% in recent years.

And in July, data showed that half of all US investment-grade-credit volumes were transacted electronically. In the high yield space, this figure was roughly 30%.

Credit markets are changing before our eyes, in one of the most significant structural shifts in 21^st-century finance so far. The electronification of credit trading brings with it innovations that will radically alter how institutional investors approach fixed income strategies and allocations. And for systematic managers, it represents a new horizon of opportunity in 2026 and beyond.

The story in numbers

Driving this transformation is the fact that it’s easier to invest in credit markets than ever before. The data emerging from 2025 indicates how far the opportunity set has widened. Trading activity surged 23% year-to-date compared to the average of the previous three years, building on a sustained trend of 15% annual growth in trade counts. More importantly, the Amihud ratio — a key measure of illiquidity — has declined by 37% since 2023, with trading costs falling from 12 basis points (bps) per million dollars traded to just 7.5 bps today. Perhaps most remarkably, US$1.1 trillion worth of corporate bonds have transitioned from illiquid to liquid over the past five years, representing an 11% reduction in the low-liquidity universe.¹

Liquid gold: lower trading costs are a boon to systematic managers

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Source: Trace, ICE BoAML as at 30 September 2025.

The systematic advantage

Systematic managers, with their characteristically higher turnover and broad universe approach, are well-positioned to capitalise on these improvements. Where other managers may focus on concentrated, special situation investments, systematic strategies evaluate the entire opportunity set to identify optimal alpha generation. The combination of increased liquidity, reduced transaction costs, and an expanded tradeable universe opens the opportunity set for quantitative approaches that can rapidly process vast amounts of market data and execute at scale.

The parallel with equity market electronification is instructive. When equity markets underwent similar transformation decades ago, systematic managers emerged as dominant forces, leveraging their ability to process information efficiently and execute strategies across thousands of securities simultaneously.

Active management in an efficient market paradox

Consistent with the shift seen in equity markets , the changing credit landscape is primed for nimble, active management. Crucially, greater market efficiency doesn't eliminate alpha opportunities; it democratises access to them, while reducing the cost of capture. When transaction costs fall and liquidity improves, the economic viability of smaller, more frequent trades increases dramatically. This expansion of the feasible opportunity set enhances the value proposition for sophisticated active managers who can identify and exploit these opportunities systematically.

Recently, we’ve seen steps forward for active approaches across the asset class, including in unlikely corners of the market. Securitised products have long been a discretionary player’s game – with high complexity, high heterogeneity and negotiated pricing all barriers to systematic approaches. However, we see evidence this is changing. In mortgage-backed securities, the highly liquid ‘to be announced’ (TBA) market has been electronic for years and trades generic mortgage pools. Specified pools, which allow buyers to select specific mortgage characteristics, may be candidates for increased electronic and portfolio trading soon. Other securitised asset classes, such as collateralised loan obligations (CLOs) and asset-backed securities (ABS) may open themselves up to more systematic approaches in the near future, too.

Revolution, not evolution

The convergence of electronic trading infrastructure, reduced transaction costs, and expanded market breadth creates a serendipitous environment for systematic credit strategies. As markets continue to develop, managers who effectively harness these changes while maintaining rigorous risk management will likely capture a disproportionate share of alpha-generation opportunities.

This is not evolutionary, but revolutionary. It is a restructuring of credit market architecture that promises to reward innovation and efficiency for years to come.

1. All data in this paragraph was sourced from Trace, ICE BoAML as at 30 September 2025.