Bond Trading Platforms Making Inroads
As banks scale back their market making activities in the fixed income sector, electronic matching venues are making their presence felt.
In Europe, NYSE Euronext’s NYSE BondMatch and TradingScreen’s soon-to-be-launched Galaxy are multilateral trading facilities intended to replicate the exchange-based models found in the futures and equities markets, including electronic price discovery and execution as well as central clearing.
“Bond markets continue to be subjected to unprecedented challenges, from liquidity gaps to widening spreads creating the need for greater efficiency and transparency,” said Philippe Buhannic, president and chief executive of TradingScreen.
“Historically, the fixed income market was organized around spreads between bid and offer. In the new model, pricing is very transparent.”
Banks, which historically have derived a large portion of their revenue from bond trading and sales, are scaling back on that side of the business in the face of regulations that dictate higher levels of capital and restrictions on proprietary trading.
“The markets always seem to evolve and adapt, and we should not expect that to change,” said Mark Coriaty, managing director at Ledgex Systems, a software provider. “Over the last 15 years we have seen the markets transform from a relationship-driven, handshake business to a lightning-fast electronic marketplace.”
As a result of the Volcker Rule ban on proprietary trading, banks have significantly curtailed market making activity.
“While the fixed income market has doubled in size, the inventory of bonds that banks hold for market making purposes has been reduced to 20% of what it used to be,” said Buhannic at TradingScreen.
Electronic venues, some of them initiated by the buy side, are stepping in to fill the void left by the reduced role of banks.
“The historic specialists on the trading desk are going to need to start trading other asset classes, and they’ll be looking to do so on a single screen with a single connection to all of their execution counterparties,” said Chris Hollands, head of EMEA sales at TradingScreen.
BlackRock recently announced the Aladdin Trading Network, which is intended to cross client bond trades. BlackRock would receive a fee, smaller than the fees charged by banks, which would cover associated costs.
Meanwhile, NYSE and TradingScreen are partnering up to enable institutional investors to view the European Central Limit Order Book (ECOB), which displays liquidity on NYSE BondMatch and TradingScreen’s Galaxy.
As soon as investors are ready to trade on the ECOB, their screens will be reconfigured from “view” to “trading” mode by TradingSceen, and licensing costs will shift to the market-member intermediaries that these investors have selected to executer their orders.
“In the future, the sell side will function as intermediaries between the buy side and electronic trading venues, which is very much and equity and futures model,” Buhannic at TradingScreen said.
The continued development of electronic bond trading could potentially alter the playing field over the medium term, spawning increased competition in the space.
In response to potential competition from independent third-party vendors, certain financial institutions are in the process of introducing their own competing platforms.
Goldman Sachs is reportedly readying GSessions, an automated electronic trading platform for corporate credit, for launch in the near future after technical glitches scuttled a planned mid-May unveiling.
According to reports, GSessions was to launch by the end of May, but was pushed back due to technical issues. It is likely erring on the side of caution, especially in the wake of high-profile technical mishaps such as Facebook’s initial public offering fiasco on Nasdaq OMX.
MiFID aims to make research costs more transparent to investors.
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Pre-trade and post-trade transparency requirements are likely to have the greatest impact.