E-Bond-Trading Systems Consolidate, Two Heavyweights Emerge

When Neal Rayner, a portfolio analyst with Deutsche Asset Management in Philadelphia attended the Bond Market Association's (BMA) technology expo in December 2000, the exhibit floor was a bustling e-commerce bazaar of electronic-bond-trading systems -- all vying to revolutionize the fixed-income business. Entrepreneurs, flush with venture-capital money and the "irrational exuberance" of the booming-Internet economy, were hawking upwards of 60 start-up, online-bond-trading platforms, touting their technology and looking to sign up buy-side and sell-side participants.

With $45 billion in domestic assets under management, Deutsche was already using TradeWeb LLC for Treasuries and was seriously looking at MarketAxess, a new multi-dealer disclosed platform for trading in corporate bonds, as well as other credit instruments. On the lookout for other systems, Rayner and a colleague stuffed their shopping bags with pamphlets and marketing paraphernalia. After evaluating the companies, they predicted only three systems would survive.

One year later, on Dec. 13, 2001, Rayner's colleague returned to the fixed-income-technology event without him. After perusing the show floor he called Rayner: "It was like a graveyard compared to what it was the year before. You would be shocked."

What a difference a year makes
Consolidation has rocked the overcrowded landscape of online-bond-trading systems since last year, as the harsh realities of overcapacity, contraction in the Internet economy and unsustainable business models precipitated a shakeout.

According to the BMA's annual survey of electronic, fixed-income-transaction systems conducted in late 2001, 21 systems have disappeared.

Currently there are 49 systems based in the United States trading fixed-income securities and derivatives, down from 68 last year and 11 in 1997, the report says.

"The exuberant growth that went on for a couple of years has definitely passed," comments Michael Decker, senior vice president for research and policy analysis at the BMA who conducted the annual review, adding that in the past six months, no new trading platforms have entered the market.

Among the casualties are BondUSA.com, CFOWeb, Intervest, Limitrader, TruMarkets and Visible Markets, while Trading Edge's BondLink was acquired by MarketAxess, and the European Bond Click merged with BondVision.

Another platform that failed to build critical mass was BondConnect, backed by State Street Bank, a comprehensive and complex corporate-bond-trading system that allowed for auctions, crosses and portfolio swaps. But clearly, the biggest name to fall was BondBook, an anonymous, all-to-all-trading platform, sponsored by Wall Street's top fixed-income dealers that required institutional investors to take on price discovery and market-making roles.

"It kind of gets to this idea of trading systems being evolutionary versus revolutionary," says Decker. The ones that have "emulated the way that the market has traditionally traded, have done the best ... at least so far," he says.

Richard McVey, chief-executive officer of MarketAxess, contends that "Consolidation throughout 2001 has been a very good thing for the fixed-income industry. There were far too many platforms for dealers and investors to possibly support and connect to, and the consolidation is down to a couple of very strong platforms that look like they have the breadth of audience and product capabilities to be successful for the long haul."

Indeed, the dealer-to-customer market for fixed-income-transaction systems is now concentrated in two or three platforms: MarketAxess for corporate bonds, and TradeWeb for Treasuries and other liquid-debt securities.

Both systems offer a disclosed model where customers know their counter party and can rapidly reach multiple dealers. Still in its infancy, MarketAxess has made a big splash in high-grade corporate bonds, emerging markets in the United States and Eurobonds in Europe, with plans to add high-yield to the U.S. system in February. "We are clearly focusing on the less liquid area where demand for change in the market is running very high," says McVey.

However, it is TradeWeb's anticipated move into corporate bonds, a move that could place it in direct competition with MarketAxess, which has the industry buzzing.

"We intend to be in corporates within the first half of the year," says Jim Toffey, CEO of TradeWeb, confirming industry rumors to that effect and noting that the firm will start with the most liquid corporate sector.

Though it has been dubbed a Treasury platform, over the past year TradeWeb has expanded into agencies, commercial paper, TBA mortgages and European-sovereign debt as well as Pfandbriefe (German-mortgage bonds).

In fact, Treasuries now account for less than half of TradeWeb's total $40 billion daily-trading volume. Plans are to launch trading in euro-supernational debt and euro-denominated commercial paper this year, says Toffey.

"TradeWeb is extremely functional. It has the (market-making) support of the dealer community. Other systems had more sizzle, more bells and whistles, but were more complicated to use. TradeWeb works," comments Tom Girard, managing director of Weiss, Peck & Greer, a N.Y.-based money-management firm.

As a fiduciary, he notes that the buy side has an obligation to seek three, four or five bids and offers from competing dealers. "TradeWeb makes this easy and efficient," he says. "In the past you had to juggle three or four dealers on the phone or tie up other portfolio managers," he explains. "One would call Goldman, another Salomon. With less human intervention it cuts down on costs," he adds.

TradeWeb is a large element in any fixed-income-manager's business, says Deutsche's Rayner, who does probably close to 40 percent of trades on TradeWeb, as compared to zero two years ago; for corporate bonds, where he's using MarketAxess and Bloomberg's The Spread Execution System, he trades around 10 percent.

On MarketAxess, Deutsche's Rayner says he can go to a large number of dealers very quickly in both liquid and illiquid securities and save the time of making 10 phone calls. "Obviously when you're dealing with a $4 billion Ford deal, the markets are pretty transparent," he says.

Another feature Rayner likes is access to research from all the different brokerage houses. "MarketAxess allows you to select new issuers of securities and when new research is produced, (it) sends you an e-mail. You don't have to constantly monitor it," says the portfolio analyst.

According to Deutsche's Rayner, there are about 1,100 bids and 250 offers on MarketAxess in corporate bonds, whereas the Bloomberg Spread Execution System, an anonymous platform, has around 120.

Even so, Bill Jackson, managing director at Wells Capital Management in Denver, Colo., raises the point that Goldman Sachs and Merrill Lynch "are the two obvious missing links," in terms of dealers not on the system. While he says the bidding process on MarketAxess works reasonably well, he does see difficulties.