A recent report by McKinsey & Co. and Greenwich Associates concluded the market is not ready for electronic trading of fixed income. Michael Chuang, CEO and founder of iTB Holdings, a company that continues to add clients to their fixed income electronic trading platform, would disagree.
Fixed income, historically, has been lacking the sort of electronic execution and discovery technology that equity markets are familiar with. Although both iTB and McKinsey are skeptical they could ever bear full resemblance to the equity market, ITB is on a mission to bring that efficiency to the institutional bond market. So far, the success has been not only beat the odds, but growing exponentially.
The research from McKinsey used information surveyed from 117 institutional corporate bond investors in the United States and Europe. According to their executive summary, findings suggest "full-fledged e-trading in corporate bond markets will be slow to arrive (if at all)," and that "few participants foresee a revolution in e-trading, while most expect multi-dealer RFQ platforms to continue to prevail."
"I respect the brand behind McKinsey, and value their methodology and research, but fundamentally we disagree on their final analysis," explains Chuang. "We have this view because, as a result of what we do and the clients we have, and the industry trends we are seeing and creating, we have concrete evidence it is happening." Yes, he concedes, change is happening slowly, but it is certainly happening.
"For every survey saying it's not happening, we have more customers proving it is. We are a trading technology company for fixed income providing exactly the service the McKinsey report says will be slow coming. Our customers are adopting electronic trading and execution service for institutional investors and our customer base are the same respondents in the McKinsey survey, they're large institutional asset managers, and some of the largest in the country."
How it Works
Historically, fixed income vendors focused on a customer base of online brokerage firms and advisors, but iTB's trading platform expands the market to institutional investors, a demographic their business partners don't currently talk to. The firm does so by taking price data and liquidity from execution venues and putting it on a platform designed specifically for institutional end customers. "We also provide sales and market capability that vendors don't have in house," adds Chuang.
Over the past couple years the number of iTB data providers have quadrupled, and the number of clients have grown substantially. Chuang says new clients are coming on board exponentially; faster than last year, than earlier this year, even from a few months ago. But to keep it in perspective, the client base is still relatively small. "It's not a status quo, but the McKinsey report says the status quo is something different. I guess our take is that we have data that shows it is slowly changing."
Building a market for electronic bond market is no walk in the park, and iTB admits they've had their fair share of challenges breaking ground. "It's immensely challenging to connect the data. It's very hard, both from a technology perspective as well as from business perspective," explains Chuang. "There's a ton of data on our platform, technology makes it organized and successful, but executing the technology integration wasn't nearly the hardest part. What's more challenging is lining up all the data providers in a market that's sometimes unclear in the ultimate business direction, especially when the industry is going through changes. Basically, it becomes harder to collectively organize and connect players in the market place and point them on a singular mission."
He says the most common objection faced from providers is that they didn't agree with the industry trend or didn't think iTB and their mission added any value to their business. Current customers would disagree. "We're the most connected tech company in the market place now because they've recognized that [value]." explains Chuang. "We're a cost savings for them, and bring their information faster to market. Over time more will partner with us. We want to be a mutual player and connect the dots to the customer."
Questioning the Report
As for the report at the crux the electronic bond trading debate, iTB believes it has a few flaws that skewed the data.
Adoption "Their view, is that it's less likely than most people think, if at all, that the set up for market change is there. So there are some nuances I disagree with. In general, we're of the view that, as an electronic services trading provider, the customer population is greater than they believe it's going to be. That's my high level."
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Timing McKinsey supported its analysis by saying the liquidity shortage was not as bad as many had feared. But here's what Chuang finds curious: "They acknowledged the data points they used were from the beginning of the year. It didn't include the latter part of the year in the analysis, when Bernanke talked about tapering in the interest rate policy in June... January though April/May was a period of extreme calmness, so I thought that was a bias of data selection. It was correct data, but in an odd period." He adds, "My objective is not to challenge, but I just want to make sure their analysis is put into context, their period was very suitable for their view."
Survey "Another thing that I noticed is they draw a big part of their forecast on electronification based on surveys of the marketplace." 80% in the McKinsey survey said electronic fixed income trading is less likely to occur in the next five years. "Generally, if our jobs as innovators were as easy as sending out a survey asking if they want this service, there would be no reason for surveys to exist... Any innovation in history is innovation because majority of people don't have that view that it needed or should be done. Innovation is close to non-majority, how can it be innovation if everyone is doing it?"
Interest Finally, the bond market must have noticed that prior to this report McKinsey had zero presence in fixed income capital markets. "I found it interesting that even though they are a reputable consulting leader, they're just now taking interest in the fixed income side of things. In 15 years I've never seen anything from them." says Chuang. "What I think that means is this is a sign of the times, when all of a sudden things get interesting. I think this is one of those cases."