“The idea is that John Thain wants to trade bonds. It doesn’t make sense to be an intergalactic liquidity pool and ignore two-thirds of the market,” says Ed Bishop, president of Kestral Technologies, a leading developer of fixed income trading and risk management technology.

Kestrel is developing a Web-based trading application for NYSE-member firms to trade corporate bonds issues by firms listed on the NYSE. “We became a prime contractor to build the Internet access,” explains Bishop.

Kestrel already has eChannel Manager, a universal connectivity manager (formerly known as Qwik KonneKT) that publishes real-time executable markets in fixed-income securities to multiple ECNs including eSpeed, Thomson TradeWeb, BondDesk, MarketAxess and Value Bond, and to individual counterparties.

Separately, Townsend Analytics, which has a long history with Archipelago and the NYSE in terms of developing matching engines and in providing access to liquidity, is offering Real Tick, a multi-broker, multi-asset, direct-access trading platform as a single point of access into the new fixed-income trading platform.

In the case of NYSE Bonds, Kestrel’s eChannel Manager will take the prices that are going to come from the liquidity providers —member firms such as a Merrill Lynch or a Lehman Brothers — that will be publishing firm quotes and orders. (Retail investors will need to trade through member firms, says Bishop. But a firm such as Goldman Sachs could let a buy-side customer such as Fidelity trade under its aegis, he notes. These orders will be matched in NYSE Arca, which then organizes the best bids and offers.)

“We’ll take that information off Arca and represent that to the end user in a way that allows them to log in, get access and set up permission,” explains Bishop. Once the user logs in, he’s in the main screen and can select the bonds.

Kestral says the new Web platform will provide top-of-market quotes and full depth-of-book for each of the bonds it trades. In addition, Kestrel will provide bond search functionality and will manage the price-to-yield conversions that are used in the fixed income trading market. “You will be able to aggregate the markets from as many dealers that want to participate and there could be huge depth,” predicts Bishop, a former director of fixed-income arbitrage at Drexel Burnham Lambert.

“This could very well become one of the primary liquidity pools for fixed income trading,” says Kestrel’s Bishop. “There’s absolutely no technical reason to prevent that,” says Bishop in an interview with Wall Street & Technology.

But in order to succeed, Bishop says, the new platform must be easy and economical to use, which looks to be the case, he says. The NYSE is also changing the current trading model to boost transparency. While the dominant ECNs –- Thomson TradeWeb in Treasuries and agency bonds and Market Axess in corporate bonds — use a request-for-quote model where the investor selects a dealer and enters a negotiation, the NYSE is going to publish firm markets. “You point and click and you’re done,” says Bishop. “The question is how many dealers are going to be willing to display their wares there and put firm orders in?” he adds.

“I believe that a dealer wants to show their wares as many places as possible,” continues Bishop. The former trader maintains that dealers will want to show their inventory on every retail and wholesale channel, so they would want to show firm orders on an electronic exchange. “If properly backed and groomed, the stock exchange’s business in fixed income could become dominant,” he says.

The NYSE plans to launch the new fixed-income platform in early 2007, pending SEC approval, though Real Tick notes the launch could be as early as December of 2006.

Right now there are about 1,000 corporate bonds eligible to trade, but the NYSE is applying for an exemption from the SEC to include the corporate debt of all NYSE-listed equity issuers and their wholly owned subsidiaries. Once that approval is received, there could be 6,000 eligible bonds in the future, according to the NYSE's release.