Choices: Dealers Can No Longer Ignore Third-Party Trading Sites
E-commerce has finally found its way into the fixed-income markets, and is slowly inching its way into derivatives and foreign exchange. The investment banks first caught wind of the coming shift two years ago with the emergence of TradeWeb, an online Treasury trading system that allows investment managers to query up to five dealers at once. Eleven of the top dealers in the United States-including Credit Suisse First Boston, Goldman Sachs and Lehman Brothers-signed on emphatically because they were given a great opportunity to offload their Treasuries, which as one consultant put it, "sell themselves." TradeWeb proved a perfect opportunity for these market leaders to reapportion their sales force to more complex, less liquid and higher margin instruments. As opposed to representing a threat, TradeWeb proved to be a boon for these companies. Fine, no seismic shift in power yet.
But, then, last year the City of Pittsburgh decided to sell its municipal bonds over the Web through MuniAuction.com, and the WorldBank did the same with the first global electronic bond offering. And then Merrill Lynch formed Direct Markets, coupling all of its institutional online trading efforts into one portal for its clients. More recently, we've received word of Chase Manhattan Corp., J.P. Morgan and Bear Stearns allying to create their own online fixed-income trading system, Market Axxess, which purports to offer the breadth and depth of the very dealers supporting the system.
Today, the business-to-business online landscape is dotted with investment banks rushing to create their own proprietary sites, or join with others to create an industry consortium, all in a hopeless attempt to maintain the current power structure. The other option for these firms is to sign up with a site developed by a third-party where they risk even further disintermediation from their clients and decreasing margins, but, at least, they'll be selling their securities. A lot of chickens-without-heads running around, hedging that either one or the other, or many of these new distribution platforms will succeed.
"Goldman, for example, is considered a leader because they've done so much to move onto the Web," says an industry consultant. "But, on the other hand, they've invested in everything that's come out. That's obviously their strategy, but I question whether it's truly a strategy or a defensive move. If it's the latter, that could be detrimental."
Therein lies the rub. The very future of the major dealers is now threatened by this thing called the Internet. This thing that their sons and daughters log onto after school to chat with their friends. This thing that sells books and toys. If they don't get THIS THING right, they may just lose it all.
Then, there is CFOWeb.com, which appears to be the culmination of all these tensions. Harpal Sandhu, CEO, and Bill Clark, vice president, worldwide marketing, are attempting to create a one-stop trading and information shop on the Web for corporate treasurers and CFOs and fund managers. They are set to go live with a service that intends to offer not only multiple bids on a single security type like other sites out there, but commingled prices from multiple dealers on every security out there, notably foreign exchange and derivatives. Whether CFOWeb succeeds will depend on the willingness of the participating dealers to post not only some, but most of their products. Despite the fact that it has yet to go live, the site already counts 2300 buy-side institutions as members. The site is completely unproven, and the idea radical, but the dealers that elect to sit out may just miss out on the next big thing.
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