Amid all the craziness and volatility in U.S. bonds last month,a few telling data points emerged that reflect where the market isheading. As some measures of trading surged to records, thosecarried out by Wall Street's biggest banks lagged behind.

Daily trading of corporate bonds averaged $21.8 billion inOctober, the most ever, according to the Securities Industry &Financial Markets Association. Meanwhile, at the 22 primary dealersthat are counterparties with the Federal Reserve, it was aboutaverage for the year.

U.S. government bond volumes, too, surged to a record $945.9billion on Oct. 15 at ICAP Plc, the world's largest interdealerbroker, as yields plunged the most since 2009. Trading at theprimary dealers that week only climbed to the highest since June2013, Fed data show.

The data suggest the biggest banks are losing a bit of theirdominance over the bond market as post-crisis regulations promptthem to cut staff and inventories of riskier debt. In response,investors are changing the way they do business, transacting morefrequently on electronic exchanges and stepping into trading oncedominated by dealers.

“It's going to force the market to adjust and compensate,” saidDavid Breazzano, who manages $8.2 billion in high-yield bonds andloans as DDJ Capital Management LLC's chief investment officer.

Market Volatility

Last month, bond prices swung the most in more than a year asinvestors grew jittery about plunging oil prices and slowing globalgrowth. Implied volatility in Treasuries, as measured by Bank ofAmerica Merrill Lynch's MOVE index, was 19 percent higher inOctober than the average over the prior year.

The market was choppy at times, with volumes dropping whenprices moved most. Still, the numbers show that investors foundways to maneuver, even with less dealer involvement.

Junk-bond trading averaged a record $8.3 billion a day inOctober, 26 percent higher than the average during the previous 12months, according to the Financial Industry Regulatory Authority.The volume of speculative-grade debt traded on MarketAxess HoldingsInc.'s electronic system last month was almost 30 percent higherthan the prior record.

At the same time, corporate-bond trading at primary dealersaveraged $111 billion a week in October, just under the $112billion average during the prior year, Fed data show.

Part of the decline in activity at Wall Street's biggest bankscan be attributed to a drop-off in new corporate-bond sales, whichtend to drive a significant portion of their business.

Another reason: The firms have been steadily cutting theirinventories of riskier debt. They slashed their high-yield bondholdings 68 percent in the week ended Oct. 15 to a net $2 billion,Fed data show.

This means that they have less ability to opportunistically buybonds when some fund has to liquidate big positions. Perhaps thisleaves more opportunity for electronic-trading platforms, smallerfirms, and money managers to fill in the gap.

It's hard to measure how easy it is for investors to maneuver indebt markets, or test whether they'll be able to liquidate theirassets quickly in a deteriorating market.

“Liquidity is a perennial concern for investors,” wrote UBS AGstrategists Matthew Mish, Boris Rjavinski and Stephen Caprio in anOct. 23 report. “Interest in the topic has soared and, to be sure,it is ever-changing.”

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