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.