Last night, BlackRock, the behemoth asset manager, and MarketAxess announced a strategic alliance to create a unified, open trading solution in the U.S. credit markets. But the move also raises questions about the status of BlackRock’s own efforts to create a crossing network for buy side clients.
However, the move is also sign that BlackRock’s own efforts to enable institutional customers to match trades in corporate bonds through its Alladin Trading Network (ATN) have not met expectations.
According to yesterday’s Wall Street Journal article, BlackRock’s plan to bypass Wall Street broker dealers by developing a crossing network for pension plans and other buy side asset managers that use its Alladin enterprise investment system has not worked out and the firm is retrenching on its go-it-alone strategy. While BlackRock’s ATN is still in its testing phase, very few trades per day have been completed since the ATN was launched last spring, according to an unnamed source cited in the WSJ article.
In fact, the WSJ reports that BlackRock has “shelved the development of its own platform now that it has the MarketAxess portal.
The alliance with MarketAxess will enable BlackRock asset management and its clients to tap into the established electronic trading platform’s network of more than 1,000 asset mangers, insurance companies and other investor firms, and broker dealers that actively use the platform.
“Our goal is to reduce fragmentation and improve liquidity in the credit markets by providing a wide range of electronic trading solutions to a vast network of investors and market participants,” said Richard McVey, chairman and chief executive officer of MarketAxess, commenting on the news during the firm’s first quarter earnings call this morning. McVey said the alliance would create seamless access between users of BlackRock’s Alladin system and MarketAxess ‘s online trading platform for credit products.
MarketAxess will run electronic trading and broker dealer operations, which will be connected to BlackRock’s enterprise investment system, Aladdin, that hosts $14 trillion in BlackRock and Aladdin client assets, according to the release. Together, they plan to turn BlackRock’s ATN into a fixed income trading portal that will consolidate fragmented liquidity from the Aladdin clients and expand access to the broader marketplace, stated the release.
According to McVey on the call, MarketAxess has been talking with BlackRock for about a year. But McVey said he didn’t have any detailed information of the trading volumes on ATN. He said that BlackRock has been consistent in saying that it wants to improve liquidity in credit market for the benefit of all market participants and the second goal is to improve the Alladin value proposition. “We decided the best way to facilitate those goals is to combine those operations with MarketAxess,” he said.
The alliance is a huge positive for MarketAxess since it will gain prominent position via the technology integration with BlackRock’s Alladin buy-side users.
Since the majority of the Alladin clients are already users of MarketAxess today, so it’s not clear that MarketAxess will be gaining new clients it doesn’t already have. “However, the work we contemplate involves much deeper integration between the Alladin system and the MarketAxess trading system, said McVey. “To the extent we can make it easier for clients to transact on the platforms, it’s likely we will find an increase in the order matching capabilities,” he said.
Both BlackRock and other buy-side firms are concerned about a liquidity crisis in corporate bonds. Dealers are holding smaller inventories of corporate bonds totaling $56 billion, which are 75 percent below peak levels of $230 billion before the financial crisis, reflecting balance sheet constraints.
MarketAxess has built a request for quote (RFQ) network that connects buy side firms with a vast number of dealers. The firm handled 12.3 percent of all U.S. corporate bond trades in the secondary market, up from 11.4 percent last year. Lately, the firm has been rolling out new “open trading protocols” which allow the buy side to submit lists of indicative prices to more directly interact with the market, without going through middlemen. On the earnings call, McVey noted that 59 percent of all high-grade inquiries were placed into the Market List order book, while completed client-to-client trades increased 62 percent form the fourth quarter.
On the call, McVey said the strategic alliance with BlackRock “represents a major step forward for our open trading initiatives and for the development of new electronic trading liquidity source for high-grade credit.” While the combination of BlackRock and MarketAxess could be very influential in the marketplace, they are competing in a shifting landscape that includes other e-trading ventures.
A number of new trading initiatives have emerged such as single dealer networks from Goldman Sachs Session and Morgan Stanley Pool, among others. In addition, Bond Edge launched a central marketplace for corporate bonds three years ago that is geared to allowing the buy side to trade directly with each other or with other investors or dealers.
“It’s no surprise that new competition is popping up,” said McVey. Demand for electronic trading solutions is running high and most analysts predict a significant increase in the next three to five years, he noted.
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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio