MTS B2SCAN is a web-based pre-trade information tool that matches buyers and sellers of credit instruments. By aggregating bank inventory, runs and axes, it enables asset managers to search for the bonds they wish to trade, identify an appropriate counterparty in an efficient and effective manner and execute the trade on MTS BondVision.
MTS B2SCAN provides a powerful search engine that allows buy-side traders to search for axed bonds while at the same time keeping control of the information they share. Clients can search MTS B2SCAN’s database to identify a bank that is willing to buy or sell a particular bond or list of bonds. With over 3,000 bonds axed on average every day, MTS B2SCAN significantly increases the probability of a successful trade and improves the efficiency of the execution workflow process.
Buy-side benefits from:
The majority of the 33 live electronic corporate bonds trading platforms, and the eight due to launch, will have failed in three years time according to consultancy GreySpark.
Frederic Ponzo, managing partner, and Russell Dinnage, senior consultant, capital markets intelligence at GreySpark said in the “Rebooting the Corporate Bonds Market” report that, until recently, the new corporate bond trading platforms have either tried to replicate mechanisms in the equitymarket or to disintermediate banks.
“So far, none of the proposed trading solutions can demonstrate their viability without the active involvement of broker-dealers,” said the report. “In 2015, the role of banks in the corporate bonds market appears irreplaceable when it comes to managing the time mismatch between buyers and sellers, or to generating fair and tradable prices.”
The consultancy said that 82.6% of the annual corporate bonds turnover in the US still goes though the top 20 dealers, and 84.8% in Europe, despite banks reducing their balance sheets. Before the financial crisis, the largest Wall Street dealers held $33bn of corporate bonds on their trading books, which has fallen to $15bn this year due to capital constraints from regulators.
Greyspark said: “Severely undermined by the recent regulatory reforms, the market structure must evolve or be completely overhauled in order to support the healthy secondary trading that, in turn, is required to support the primary issuance financing the real economy.”
Instead of trying to remove banks, some smart data solutions are helping the broker-dealers to do more with less by optimising the deployment of their capital to the benefit of their key clients.
“If they integrate themselves into the existing credit trading workflows, these venues could help to significantly expand the amount of risk netted between dealers and free space in the bank inventories to service their customers,” said Greyspark.
For example, Algomi, which builds social networks for the corporate bond market, formed its first partnership with an exchange in January. SIX Swiss Exchange is launching an electronic platform for trading large blocks of corporate bonds in the first half of 2015 with Algomi as a technology partner.
Other European exchanges have also launched their own bond trading initiatives. MTS, the London Stock Exchange’s fixed income trading business, has joined up with B2SCAN, a French platform which makes it easier for asset managers to search for a particular bond, or list of bonds, and then electronically execute their trades on MTS BondVision. B2SCAN allows banks to advertise the bonds they want to buy or sell to selected asset managers and users include Bank of America Merrill Lynch, HSBC, UBS Citi and Societe Generale.
Last year Deutsche Börse, the German exchange operator, acquired a minority stake in Bondcube, a London and Boston-based electronic fixed income trading system, which is not based on a buy-side request for quote to the sell side. Instead Bondcube is an all-to-all market where users post indications of interest and the platform finds matches and also analyses historic orders to find matches in infrequently traded bonds. In December Bondcube received regulatory approval to trade in 31 European countries and in January became a Finra broker/dealer member in the US.
The Greyspark report found that in 2015, there are already at least 33 live electronic corporate bonds trading platforms, and at least another eight are reportedly in various stages of pre-launch development.
“The majority of the new trading platforms discussed in this report will no longer be trading in three-year’s time,” added Greyspark.
SIX Swiss Exchange is to launch an electronic platform for trading corporate bonds in the first half of 2015.
This platform will allow SIX Swiss Exchange to provide market participants with a more efficient trading of larger blocks also in less liquid issues. The new platform's innovative trading model was developed in close cooperation with current sell-side market participants.
The launch of the new trading platform in the first half of 2015 will result in the creation of a multilateral liquidity pool for the trading of large order of corporate bonds. This will help eliminate the disadvantages of inefficient off-exchange trading: insufficient liquidity, small trade sizes, timeconsuming price negotiations, as well as the worry that prices could be negatively influenced by premature disclosure. An innovative matching logic brings market participants together and ensures a regulated market is created in which protection against information leaks is assured, pricing and volumes are agreed electronically and execution is completed without any negative market impact.
The new trading platform is part of SIX Swiss Exchange’s “Over the Exchange initiative”, which offers new exchange services to the exchange’s broadly diversified client base. SIX Swiss Exchange is therefore providing an alternative to the highly fragmented bond trading arena, most of which is conducted outside an exchange infrastructure and is therefore inefficient. The new trading platform will facilitate efficient, competitive execution particularly for less liquid corporate bonds and large trades of at least two million in EUR, GBP or USD.
The platform will be domiciled in Switzerland and subject to regulatory supervision by the Swiss Financial Market Supervisory Authority (FINMA). SIX Exchange Regulation will be responsible for the market supervision. Algomi Ltd. was selected as the technology partner for the development of this industry-leading solution.
Christian Katz, Division CEO Swiss Exchange, comments: "With the new electronic trading platform for corporate bonds, we are creating a regulated market that will benefit not only market professionals but also provide greater efficiency for their clients, in other words pension funds and asset managers.
Trading participants in this electronic platform will be able to transact large orders of bonds simply and efficiently via the new liquidity pool and exchange.
LONDON, Feb 13 (IFR) - Around 30 e-trading platforms are currently competing to address the liquidity crisis in corporate bond trading, but market players say most will fall by the wayside in the months ahead.
"There are 30-odd platforms currently looking for a share of activity," Mark Benstead, senior portfolio manager for UK credit at L&G, said at a recent credit conference.
"But there certainly won't be 30 in a year's time."
The surge of platforms comes as fixed income finds itself grappling with a new and confusing paradox: while the ability to conduct large trades has withered, there are more bonds than ever before.
As a result of stricter regulations and higher capital costs, dealers have shrunk their bond inventories dramatically.
According to the Federal Reserve Bank of New York, corporate bond inventories have decreased more than 75% since before the financial crisis, from around US$250bn then to US$57bn today.
But the net total of corporate bonds outstanding has skyrocketed from US$5.2trn in 2007, according to trade industry group Sifma, to some US$7.7trn now.
New platforms, some still just little more than an idea, are stepping into the breach to try to resolve this. [For list of platforms see FACTBOX: ID:L6N0VE553]
Some of the platforms are promoted by dealers, such as HSBC's Credit Place and PIN from UBS, while there are a raft of independent players, including Bondcube and Electronifie.
"When designing a platform, you are faced with an impossible trinity," says Frederick Ponzo, managing partner at GreySpark Partners, a consulting firm.
"You must pick a trade-off between transparency of price discovery, managing the time mismatch and protecting against adverse leakage of information," he told IFR.
"A corporate bond execution facility cannot achieve all three. In pursuing two, the platform operator must forgo the third."
The long-standing method of liquidity provision, dealer-to-client, where corporate bond investors ask multiple banks for prices on the dominant venues - Bloomberg, Tradeweb, MarketAxess and Bondvision - has hit a hitch.
This request-for-quote (RFQ) model has thrived for smaller transactions since the financial crisis but not larger, which require accurate pre-trade prices from dealers who also need to deploy capital to warehouse risk.
Securities analysis firm TABB Group's Anthony Perrotta estimates that from a low of 7% in 2008, 15%-16% of the notional volume for dealer-to-client trading is executed via an electronic medium.
But the various new platforms spy an opportunity to facilitate larger transactions. They believe investors want to be able to trade which each other but on platforms with neutral ownership structures and where access to the data is restricted.
It is probably for these reasons that early movers from 2012, such as Goldman Sachs's G-Sessions and BlackRock's Aladdin, failed to gain traction.
As it happens, BlackRock has since teamed up with MarketAxess with an offering called Open Trading, which allows investors to trade with other investors, and recently announced an expansion into Europe.
Last summer, Tradeweb launched a US platform on which it promised pre-trade transparency, with live prices and 95% certainty of execution on certain securities - which would be an impressive undertaking by dealers. (Tradeweb is 51% owned by Thomson Reuters, and IFR is a Thomson Reuters publication.)
None of these developments has halted the march of new platforms, many of which are replicating exchange trading models, where users can trade with anyone - all-to-all. Only this week, SIX Swiss bourse launched a trade-matching venue, and Bondcube - backed by Deutsche Boerse - went live in December.
Other venues still in conception include Oasis, another all-to-all model created by Deutsche Bank, and Project Neptune, an attempt to link all trading venues, backed by a dozen banks, including Goldman Sachs, HSBC, Societe Generale, BNP Paribas and Credit Suisse.
However, there is a risk that Neptune, which will take at least a year to complete and needs substantial funding, will not be operational in time to act as a conduit for the new platforms. One of the major problems facing new venues is how to build sufficient momentum.
"If we trust the platform enough we would go up in big size in expectation that we'll get matched. But if you're not getting matched then you just give up and go elsewhere," says L&G's Benstead.
One platform that appears to have gained some traction is Credit Place, where investors can deal directly, but anonymously, with each other. This is facilitated by HSBC, which also services these clients with quotes and liquidity. Credit Place's average ticket size is around US$5.4m, versus an average corporate bond trade size of US$200k-$300k, according to HSBC.
Last year, US$23bn of orders were placed, triggering US$6.5bn worth of trades; the venue currently has 74 clients globally and HSBC estimates that will grow to over 100 by year-end.
"There's a lot of talk about matching platforms, but in credit and illiquid markets generally it is rare to achieve the perfect match," says Niall Cameron, head of markets, EMEA, at HSBC.
Finding the sweet spot
It is hard to shift from the idea that dealer-to-dealer activity is key to bridging the gap to the buy-side, which holds around 91% of corporate bond assets.
"We need to help dealers and not alienate them. The interdealer brokers should have been the winners in this situation and instead they are coming out the losers. So far, we haven't seen an interdealer exchange and this could ease the pain," says Ponzo.
There are several initiatives with dealer-to-dealer functions in the pipeline, including Swiss Exchange, Singapore Exchange and Neptune.
The idea that the existing market structure requires only a re-touch, not a complete overhaul, is behind Algomi's Honeycomb product, which has secured a strong following since it started in late 2014.
According to Stu Taylor, Algomi's chief executive, nine banks are live with the product or soon will be, including Credit Suisse, Deutsche Bank, HSBC and Nomura. The Swiss bourse also installing the system.
"Salespeople need to drag clients/holders into the arena to convince them to sell, and that isn't a 20/30-second protocol," Taylor says, adding that 30 major buy-side firms have already signed up and another 40 are currently in talks.
Despite the millions of dollars ploughed into e-trading, many doubt whether we can ever re-live pre-crisis highs of the financial bubble. It seems unlikely that an inherently illiquid asset can become liquid due to technological advances alone. (Reporting by Laura Benitez, Alex Chambers; editing by Julian Baker and Marc Carnegie)