In a deal that is expected to eventually provide institutional investors with multiple disclosure options for trading bonds over the Internet, Market Axess last week signed a letter of intent to acquire Trading Edge. The all-stock transaction, which is expected to close within 30 days, will unite Market Axess' online trading platform-a multi-dealer, counter-party disclosed system that is backed by such sell-side giants as Bear Stearns, Lehman Brothers, Credit Suisse First Boston and J.P. Morgan Chase & Co.-with Trading Edge's BondLink-a buy-side-oriented, anonymous trading system.
Collectively, the integrated Market Axess/Trading Edge platform will offer broker/dealers and institutional investors the ability to trade investment-grade corporate, high-yield, emerging market, municipal and convertible bonds online. Richard McVey, chief executive officer of Market Axess, says the new partners expect to go live with their integrated offering this year-but declines to specify a projected launch date. "Our goal is to unify the platforms and create a name just as soon as we possibly can," he says. "But the key thing for us is to use the power of our dealer group and their market making capabilities to start fostering liquidity in both platforms, and that will start immediately."
In the past, Market Axess, launched last November, has only offered its clients the ability to trade on a disclosed counter-party basis-through which their identity is revealed to the firm on the other end of a trade. But with the acquisition of Trading Edge's BondLink, the Market Axess will now be able to provide an anonymous option. "This transaction is a response to client demands for a single, standard platform that works across products and across trading styles in the credit markets, " he says. "We will give dealers and institutional investor clients their choice-they can trade on a disclosed basis or an anonymous basis within the same trading system."
McVey says the fact that Trading Edge "has built the best technology for anonymous trading in the fixed-income business" was a significant factor in Market Axess' decision to acquire the vendor. By offering clients a choice, McVey says, Market Axess will be prepared no matter which way the electronic bond trading industry turns. "There is so little trading electronically in credit markets today that it is difficult to determine exactly where certain products and certain transactions will end up, in terms of their preference for a multi-dealer disclosed model or a wide-open, anonymous exchange model," he says. "The allure of anonymous trading is taking what will be over 2,000 institutional participants in the new Market Axess and allowing them to seamlessly interact with all other participants. So it opens up the possibility that clients can trade not only with dealers, but with one another."
While Market Axess expects to take full advantage of Trading Edge's anonymity features, Trading Edge may benefit from the liquidity provided by Market Axess' sell-side participants. Market Axess's group of investors/broker-dealer participants includesBear Stearns, Lehman Brothers, CSFB, J.P. Morgan, Deutsche Bank, ABN Amro and UBS Warburg. Moreover, the firm expects to add more broker/dealers to that list in the near future. Trading Edge, in contrast, has had only limited broker/dealer support since the April 1999 launch of BondLink. "We bring a commitment of market makers and liquidity that Trading Edge has been missing," says McVey. "They have been, from their start, focused on building a buy-side system. They have some dealer participation, but, in their estimation, never quite received the commitment to deliver the liquidity that is essential for making the system work."
On top of combining their U.S. product coverage (Market Axess' investment-grade corporate bonds with Trading Edge's high-yield, emerging market, municipal and convertible bonds), the merged bond trading vendors also expect to launch coverage of European bond instruments in the near future. McVey says that, regardless of whether the integrated system has been rolled out, Market Axess plans to begin coverage of investment-grade Eurobonds and European corporate bonds in the second quarter.
The exact amount Market Axess agreed to pay to acquire Trading Edge remains unclear. Citing the fact that both companies are privately held, McVey declines to specify the monetary value of the transaction. But he says that Trading Edge-in exchange for selling 100% of its assets to Market Axess-will be given a "minority equity stake" in the yet-to-be named, combined online bond trading firm. In addition, a group of Trading Edge shareholders will be given seats on the new entity's board. One of the Trading Edge board members will likely be Murray Finebaum. Finebaum, the chairman and chief executive officer of Trading Edge, has been appointed vice chairman of Market Axess.