Mostly… fixed income and cross product eTrading

September 16, 2011

Fixed Income trading – exchanges/MTFs/SEFs/same old stuff?

I try and follow what’s going on in the world of Fixed Income trading as much as the next person in the industry who has a related day job.  After a while the whole Dodd-Franks thing starts to make my eyes spin and I need to sit down with a damp cloth on my fevered brow.

Anyway, the question that I am mulling over is what happens next?

On the one side the Fixed Income hub firms are busy rolling out SEFs and looking to put CDS electronic.

On  the other side we see at least four firms trying to push the European cash bond markets onto an exchange-like model – following on from  

The four firms I know of are:

Bondvision MTS – part of the LSE group —

Galaxy – part of TradingScreen

Bondmatch – part of NYSE

Vega-Chi – private firm with a lot of ex-Goldman Sachs guys on the team

All four seem to have similar business models.  But is there demand for the idea of pushing good old fashioned cash settled bonds onto an exchange?

Over the last few years banks have starved their credit desks of capital to the point where most banks will only work an order rather than commit capital.  So if that reading is correct then it would be an efficiency play to disintermediate the sell-side and allow buy-sides to trade against themselves in an anonymous model.  This is a similar model to that of Liquidnet “classic” where real-money buy-sides interact entirely anonymously with Liquidnet giving up all trades to JPMorgan.

But are buy-sides ready?  One analysis is based on three components: systems, people and processes.  Do buy-sides have the three components to do this?  I suggest that many do not.

The critical mass needed for an exchange in this space is not clear – certainly it’s necessary to get multiple participants on the platform but that’s not sufficient.  In order to trade you need differences of opinion in value.  That suggests to me that what is needed are different classes of buy-sides.


If I was starting up one of these exchanges I would approach the big private client businesses and ask them to participate on the platform – to provide limit orders for the book of their inventory.  Allow for multiple small clips on one side of the book to be traded against one big order on the other side in a neat way.  Allow retail and institutional folks to dance on the same platform with protection against stubbed toes…

I would also ask institutions to place limit orders for all of their hard to value/hard to sell inventory.  So many institutions find themselves holding a credit that is traded by one man in a bank in Luxembourg and he’s on paternity leave.  Stick it on the order book and see what happens.  Let’s be realistic – it’s not like you are “showing your hand” anymore than you would be if you phone the Luxembourg bank up for a price – you might find that you don’t get your face ripped off.

Get a few trades done and then you are allowing people to safely dip a toe into the water.  Make sure there is excellent post trade performance and the venue will find more order flow arriving.  It’s not going to turn into a massive amount of liquidity in the way that FTSE100 equity names trade but it will become a self perpetuating virtuous cycle.  The velocity of circulation of bonds will increase as the liquidity is concentrated and prices are published. 

Eventually the platform can move to provide a tap auction / primary listing facility.

If you ever read about Drexel Burnham Lambert and Michael Milken you see that he and that firm were credited with popularising below investment grade or junk bonds.  How?  Simple – he sold bonds and he made a two way secondary market. Investors felt secure that they could sell if needed.  I am not suggesting that the DBL model is one to follow – but the provision of the optionality of a place to sell a position makes folks much more likely to trade in the first place.

And what will the banks do if they see a move to exchange trading for cash bonds?  I know of at least two big banks that have built fixed income “MTF-like” platforms.  I cannot imagine it would be hard for them to kick the tyres, light the fires and go-live with a competitor to the four firms named above.

“Build it and they will come….”



  1. I like the suggestion RETAIL+INSTITUTIONAL=TRADES!

    In the same line, I would suggest Hedge Funds and electronic prop desks making markets as opposed to Banks

    An order book for FI doesn’t seem so crazy after all


    Comment by Alex — October 26, 2011 @ 10:32 am

  2. Hi Alex,

    Would you expect real-money institutions and retail money would feel comfortable interacting in such a direct manner with hedge funds?

    Comment by John Greenan — October 26, 2011 @ 2:56 pm

  3. My point was more on the valuation side of things as in “In order to trade you need differences of opinion in value”

    But in an anonymous order book with a CCP….there is room for debate

    Comment by Alex — October 26, 2011 @ 3:03 pm

  4. Do you think that real-money institutional investors will feel comfortable trading DVP cash bonds with a CCP and therefore T+0 margin payments?

    Comment by John Greenan — October 26, 2011 @ 3:05 pm

  5. Unfortunately not yet…. but their brokers/clearing members are, and surprisingly they do play the game (maybe from fear of eventually being disintermediated)

    Comment by Alex — October 26, 2011 @ 4:02 pm

  6. Wouldn’t you expect that the real loser in this model is the IDB rather than the broker?

    I wonder how many institutional real-money firms can trade DVP bonds on a collateralised basis…

    Comment by John Greenan — October 27, 2011 @ 7:48 am

  7. That’s what happened when you don’t put the capital anymore…you can’t expect to retain the same flow!

    Comment by Alex — October 27, 2011 @ 8:22 am

  8. Indeed, the banks are not committing capital. Do you think buy-sides will be willing to accept an effective swap of some of the quirks of fixed income trading for some of the quirks of equity trading? Split tickets, partial fills, multiple executions?
    Without wishing to harp on, but how many real money buy sides will be willing to pay up collateral on trade date? Their brokers may claim they are willing to – but will they have the capital to commit to what is a super low risk (and therefore should be low reward) activity?

    Unless the MTFs can drive in liquidity I do wonder if this whole model will end up dead on arrival? I’d be delighted to see some of the other readers post some views here….

    Comment by John Greenan — October 27, 2011 @ 3:51 pm

  9. Well then It all depends of the kind of buy-side you are.. Some will swap and others won’t
    From a trading perspective,I would really like to send orders for my hundreds of products in an order book every day – Initiating a trade as opposed to receiving a quote really empowers you!

    As for the collateral…yes that’s a tricky one…But I am sure you can sort something out with your GCM

    Comment by Alex — October 27, 2011 @ 5:23 pm

  10. Alex – “I would really like to send orders for my hundreds of products in an order book every day” – I think this makes you pretty rare. The real-money buy-siders with whom I have discussed this appear very nervous about this.

    If you do use a GCM then you are right back into the old world. You face a counterparty that has ALL of the knowledge of your book.

    I suspect that the business models that are being proposed will require tweaking. The use of a CCP suggests that a buy-side has to partner up with a sell-side to fund collateral positions between T+0 and settlement. Which then means that there is total information leakage to the GCM.

    Comment by John Greenan — October 28, 2011 @ 8:03 am

  11. That was (in my opinion) the point of this thread:
    Getting different types of players all together in one platform.
    In answer to your reply, I would admit that it makes me pretty rare…I would say let the nervous buy-side players take liquidity, but also on the other hand let the less nervous ones make the liquidity

    What I’m trying to say is that the only way I see it happening, is through an order book…I just cannot see it happening another way! Unless you have an idea/suggestion on the matter?

    As for the CCP and all it entails (ie. GCM) – I hate comparing it to the Equity world, but if we take that as a “benchmark” we could assume that people, be it now or in several years, will think or trade the same way on the fixed income scene

    Comment by Alex — October 28, 2011 @ 10:25 am

  12. None of these offerrings have the required attention of both large retail & the Swiss, German & Lux retail market. The models are all similar but have no support from a community that have been confused & an inability to allow the end client to truly see their liquidity. Why? Basically the people responsible for driving all of these platforms really do not possess the necessary knowledge both of product & client i.e. none of the people drivers know fixed income is traded nor how Buy-side can trade it in the amounts such platforms are seeking to handle. What they are doing is somewhat abiding by the original Cassiopeia & adding some tweaks. The obvious product to push here is covered bonds as the secondary market is nil once an issuance occurs. But hey since being let loose there is such little trade occurring & again end users instead of having a solution which cam amalgamate their liquidity are being offered individual solutions. The technology is basic & their as John Greenan said earlier no sigular clearing system. Has any of these guys ever heard of DVP?

    Comment by Walter — September 2, 2012 @ 11:18 am

    • “First they ignore you. Then they ridicule you ….Then……” Happy to see that we’ve finally reached the second stage!!!

      Comment by Dave — September 3, 2012 @ 8:31 am

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