September 13, 2013

Tradeweb Markets LLC, an operator of electronic fixed income and derivatives marketplaces, is acquiring BondDesk Group LLC, a U.S.-based leader in providing retail fixed income technology to wealth management firms.

The move positions Tradeweb, a major player in institutional trading, to expand its market share on the retail side, and to seek synergies between the retail order flow of BondDesk and the institutional platforms it operates.

“It’s the convergence of institutional fixed income and retail, and the desire to accelerate the trend to electronic trading,” said Howard Edelstein, Chairman and CEO of BondDesk Group in an interview today.

Tradeweb is keen to grown this space because they have a modest business in retail and large business in institutional and there’s a lot of synergy between the two,” said Edelstein. “If you add that to the macro trends in interest rates, this is actually going to be a good deal for them and in the consumer and they are going to get better prices and transparency,” said Edelstein.

The slow growth of institutional bond trading networks has led some of the larger venues to consider aggregating liquidity form platforms that cater to retail investors.

According to Tabb Group, only 22 of corporate bond volumes are traded electronically, while 78 percent are handled via voice institutional brokerage.

Two weeks ago, Reuters reported that MarketAxess and Tradeweb were vying to acquire BondDesk Group, operator of an alternative trading system (ATS) that caters to retail brokers and financial advisers. Other interested investors were said to include the London Stock Exchange and Ipreo Holdings, according to Bloomberg. Private equity firm Advent International owned a stake in BondDesk and hired Broadhaven Capital Partners LLC to sell the bond-trading venture to the market

Yesterday, Tradeweb, owned by major Wall Street firms, announced that it signed a definitive deal to acquire BondDesk Group. The financial terms of the transaction are not being disclosed. Previous reports estimated that BondDesk could fetch up to $200 million. The transaction is expected to close by the end of the year, but that depends on regulatory approvals, said Edelstein.

“The acquisition of BondDesk provides a real opportunity for Tradeweb to apply our institutional expertise more broadly to fixed income markets, and will play an important role in our efforts to drive innovative technology that delivers better access to liquidity, greater transparency and more efficiency across retail and institutional markets,” commented Lee Olesky, CEO of Tradeweb in a response via email.

“The combined business will continue to provide industry-leading service with best-of-breed platforms for retail brokers, middle market and retail investors,” Olesky further commented.

Founded in 1999, BondDesk is a pioneer in building fixed-income technology for wealth management firms to search for bonds within their own inventories. Then, when the retail firms didn’t own the bond internally, they asked BondDesk to build a matching platform, which became BondDesk ATS. The firm maintains a fixed-income technology development team in Rochester Hills, Michigan.

The acquisition will also expand Tradeweb’s reach into other fixed income asset classes. More than 80 percent of BondDesk’s volume is in the corporates and munis, while Tradeweb has mainly focused on US Treasury and US agencies , mortgages-backed-securities, sovereign debt and derivatives.

BondDesk offers an anonymous, click-to-trade platform, which has been utilized by firms in the retail brokers and financial advisers in the wealth management space.

There are over 100,000 financial advisers are using the technology matched off against 170 dealers posting liquidity and that generates north of 20,000 trades a day, said Edelstein in a previous interview. Historically, institutions have mainly traded on electronic platforms with the request-for-quote (RFQ) model), which automates the interaction with the dealers. With BondDesk’s click to trade technology, 80 percent of the orders are filled in less than 30 seconds, and the platform has a 99 % fill rate, noted Edelstein.

With the shrinkage of dealer balance sheets due to regulations imposing higher risk-based capital charges on inventories, institutions have had a harder time finding liquidity in corporate bonds.

While BondDesk mainly focuses on the odd-lot-trade –defined as less than 100 bonds or $100,000 in value— it finds that institutions have been tapping into retail liquidity.

“If you have 500 bond trades you don’t care who the counterparty is. So the idea of bringing those two markets together helps,” says Edelstein.

Some experts suggest that linking the retail and institutional markets could speed up the trend toward electronic trading.

In a note yesterday, TABB Group’s Fixed Income Research Director Will Rhode wrote: “Many asset managers and exchange-traded fund (ETF) market makers find it more efficient to execute small trades across retail Alternative Trading Systems (ATSs).”

According to Edelstein, Tradeweb can grow its existing retail business by acquiring BondDesk, but also find ways to tear down the walls between retail and institutional liquidity.

“You can actually see a day in the not-too distant future where retail and institutional get blurred because it’s a traditional barriers that have kept the market separate and inhibited the liquidity will start to break down,” said Edelstein. “There is liquidity – it’s just heard to reach,” he said.

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...