Intelligent Markets Inc. will inject a new player into the automated convertible bond market when its subsidiary, BuySideDirect, is launched toward the end of July.
BuySideDirect will start out with between 75 and 100 participating institutions and hopes to capture a large part of the market by featuring some advanced ordering capabilities. The first of these is a personalized information system whereby BuySideDirect technology alerts clients to opportunities that are in line with their past activities. "In a world where there is a small number of traders dealing with a huge universe of securities, it's really critical for a successful system to call attention to orders that may be of interest," says Jason Topaz, co-founder and chief technology officer of BuySideDirect.
The second of these functions is called contingent order capability. "Over 70 percent of the trading in this market comes from the hedge fund community," says Maureen Upton, director of marketing with BuySideDirect. That is why, she says, being able to confidently enter a hedged order with both a convertible bond and a corresponding stock component-knowing that both portions of the order will be filled simultaneously-is critical. "Hedge fund participants trade on swap. They always want to trade the stock at the same time as the convertible bond, and it's difficult for them to go and use a system where they can't get that done," says Topaz. "We don't want to be in the business of forcing people to negotiate on their hedge ratios."
One system in which Topaz says customers currently do not have contingent order capability-and the system he names as BuySideDirect's competition-is Trading Edge's BondLink. But Chairman and CEO of Trading Edge, Murray Finebaum, says that is about to change. He claims BondLink will have the capability to handle hedged orders containing stock and bond components by the end of the third quarter. And, he states, there is no substitute for a proven and market-tested product such as BondLink, which has been operating with more than 400 participating institutions since April 1999.
Finebaum says of BuySideDirect, "They have a system that, with all due respect, is untried and untested, and we have a system that's been in operation for about a year and a half already, which proves clearly that we do not only know how to build systems, but we know how to operate systems and maintain systems." Finebaum adds, "It's easier to have announcements than to have the service. The key is not only to launch it but to maintain it."
Topaz says BuySideDirect generates its income from charging a "small, pre-arranged mark-up" on both sides of the transaction. Upton claims that, on average, it is about 50 percent less than what traditional brokers are charging their clients. BuySideDirect will not be offering research or access to new issuance. Officials with BuySideDirect chose not to comment on Finebaum's statements.