The evolving market structure in fixed income trading continues to attract new entrants seeking to boost transparency and match buyers and sellers. Today, DelphX announced a new alternative trading system (ATS) for fixed income securities that will link to the SunGard Global Network.
DelphX is a neutral fixed-income market platform that provides real-time fair-value pricing and anonymous all-to-all trading for more than 25,000 issues listed on DelphX. The ATS is expected to go into beta by year- end and go into production in the first quarter of 2014.
“The world clearly needs transparency, needs liquidity and needs to see a solution other than the dealers, because the dealers can’t provide a solution,” said Larry Fondren, president and CEO of DelphX in an interview this week.
As brokers are moving to an agency model and scale back their trading operations, pretty much across the board, Fondren, who started a bond trading platform in the 1990s, said the environment is different this time around. “We think the timing for CentralX to partner with SunGard is ideal,” he said. Also a number of brokers are looking for opportunities such as Deutsche Bank, HSBC and Goldman Sachs to be involved as agency and not as principal.
The move gives DelphX access to SGN, which has links to more than 2,100 asset managers and more than 500 brokers and is available in 48 jurisdictions across the globe.
Also, DelphX said it’s setting up CentralX, a centrally cleared global facility through connectivity to SGN. CentralX will be integrated into SGN to enable interaction of orders entered by SGN users and buy-side and sell-side subscribers to DelphX, according to the release. In addition, the new market wants to integrate with liquidity from other participating ATS/ECNs and linked trading platforms.
Every order will be cleared through Broadcort, which is owned by Bank of America Merrill Lynch. “Central clearing means that the clearing firm sits between the buyer and seller. “This is how you maintain the anonymity,” said Fondren. “They don’t want to give up their trading strategy,” he said, referring to buy side firms.
The relationship with Deltix also positions SunGard to expand into fixed income trading. “As liquidity in the marketplace is drying up our institutional customer base is looking for alternative ways to execute their trades,” said Ralston, Roberts, chief operating officer, real time market data and network services, SunGard’s brokerage business in an interview. According to Roberts, SunGard is seeing interest from traditional asset managers and wealth managers specifically in US corporate bonds.
Initially the focus is on corporate bonds, DelphX is moving to asset backs and mortgage backed securities when it has the data from FINRA to publish fair market value.
Déjà vu: But this Time, the Time is Right
Fondren, an entrepreneur and expert in the credit space, is not new to the bond trading space. In 1995, he set up InterVest, an electronic bond platform that accommodated secondary trading on Bloomberg’s networks. The all-to –all model allowed parties to see all orders and to execute orders anonymously. However, in March of 1998, Intervest announced an Internet based platform for direct issuer auctions of new issues. Few bond dealers chose to post prices as the system reduced the need for their services and threatened their margins. The dealers lobbied Bloomberg, which Fondren said pulled the plug on InterVest. What followed was a big anti-trust lawsuit alleging that Bloomberg LP and several Wall Street firms helped orchestrate the demise of InterVest’s bond trading system. In 2002, InterVest settled out of court with each of the firms, except Cowen. BusinessWeek ran a story called: “Never Cross a Bond Dealer.” [InterVest’s bond system was sold to GFI Group.]
Fair Market Pricing Now the environment is different this time around, said Fondren. One of the major changes is the ability to access OTC market data from transactions in corporate bonds reported by brokers to FINRA. By using the data from the Trade Reporting and Compliance Engine (TRACE), DelphX calculates a fair market value of the security or benchmark price. It takes in Treasury pricing from Thomson Reuters and Tradeweb in real time, and it has a complete history of transactions from TRACE going back to 2011. It also takes in about 20 million trades from Interactive Data Corp. and uses the terms and conditions library from IDC to analyze every security relative to others with comparable maturities and coupons. “We are mapping these relative to each other,” explained Fondren.
Since 95 percent of the issues outstanding don’t trade on a relative basis, DelphX calculates those that do trade and where others would trade, he said. In addition, DelphX uses the TRACE information reported to FINRA by brokers in US corporate bond transactions, to calculate MAVEN values – which stands for “market adjusted value per congruent nexus. “ It analyzes the history, the experience of this security, the pricing relative to all other securities,” said Fondren. “
“People need to know the price, and those who know it, wont’ tell you,” said Fondren. An institution that goes into the order book will see the MAVEN price and a score that is based on how many times a bond traded at its MAVEN price. “You are not getting picked off if you price your order slightly below or where the MAVEN is,” he said. “You’re in the ball park, you’re not going to make an egregious mistake.”
Linking with Competitors Fondren also sees an opportunity to link CentralX to other fixed income venues like NYSE Bonds, Bonds.com and Market Axess. He said the system is designed to link with other ATSs. “The idea is that even if you are a competitor, CentralX is designed to link not only with their users but to other systems like Bonds.com and Market Axess, he said.” If a competitor has a retail order, it can be aggregated to an institutional size and similarly, institutional orders can be parsed to satisfy a retail user,” he said.
Fondren also believes that traditional institutions will realize that they can take on role of a liquidity provider with a certain amount of education. For instance, the platform can accommodate corporate debt issuers that offer shelf registrations to go direct to investors. “They can go in and put a bid into a when issued order book, that we’ve created for that new issue. That allows life insurance companies and pension plans to put in a bid, to provide liquidity where a dealer can’t cause of Volker or Dodd Frank,” said Fondren.