State Street Eyes Expansion for Bond Connect

Boston, MA-based State Street expects to incorporate a European bond database into its Bond Connect electronic fixed-income trading platform by the first quarter of next year.

After the database integration is completed, Bond Connect's incumbent client base, currently comprised of 85 buy-side institutions and 17 sell-side brokerage firms, will have the ability to trade a wide range of both U.S. and Euro-denominated debt instruments over a single trading screen.

Separately, State Street plans to expand Bond Connect's U.S. capabilities by adding coverage of municipal bonds within six months. Launched on June 6, the system currently covers high-yield bonds, investment-grade bonds, agencies, treasuries and corporates, as well as asset-backed and mortgage-backed securities.

Come early next year, of course, Bond Connect, which operates as a call auction market where buy and sell orders are matched six times a day, will cover all the equivalent European debt instruments. Through that new functionality, U.S. clients of Bond Connect will be equipped with the power to "directly and anonymously" trade Euro-denominated debt instruments, says Andrew Howieson, managing director, State Street Information Partnerships. Howieson says that instead of going through the normal process of weaving through a series of intermediaries to carry out a Euro-debt trade, clients of Bond Connect can go straight to a "pool of investors" who want to trade with them.

Simultaneous to its effort to build up liquidity in Bond Connect in the U.S., State Street is also making a strong push to establish a niche for the trading system in Europe. That effort really dates back to earlier this year, when State Street formed a joint venture-dubbed Bond Connect Europe-with Stockholm, Sweden-based OM Group. Earlier this month, OM and State Street began their marketing and sales push to try to entice European institutions that trade fixed-income products to channel orders through Bond Connect Europe, which will use the same exact matching technology as the U.S. version of the system.

Early next year, after Bond Connect Europe is up and running, European institutions that use the system will-just like their U.S. counterparts-have the power to trade a full range of Euro-denominated and U.S. debt instruments. Though State Street and OM currently have no clients lined up to beta test European Bond Connect, they are very confident that the system's cross-Atlantic capabilities will attract lots of institutions. "There are a lot of European institutions with significant U.S. debt business, and vice versa," notes Howieson.

In the U.S., Bond Connect currently runs a pair of auctions three times a day, starting at 10:30 a.m., 12:30 p.m. and 2:30 p.m. (Each of those auctions is followed by another auction 20 minutes later.) Howieson says State Street decided to run three sets of two auctions after testing Bond Connect in a pilot phase earlier this year. The people that participated in the pilot, he says, wanted the opportunity to adjust their price and quickly send in another order to Bond Connect when they did not get crossed in the initial auction. "Several people who worked with us in the pilot said 'We'd really like not to wait until the next scheduled auction,'" says Howieson. Consequently, to give clients a chance to fine tune their price and keep an order in play, State Street decided to run a second auction on the heels of the first one.

Howieson declines to reveal the percentage of orders that Bond Connect has matched since its June 6 launch. However, he says, the system has generated $16.9 billion of aggregate order volume and crossed "hundreds of millions" of dollars worth of bonds. What's more, Howieson says he is confident Bond Connect will do well, because it has successfully crossed all the different instruments it covers.

Meanwhile, in terms of adding municipals coverage to Bond Connect, Howieson says that State Street is currently evaluating different sources of muni data. Once the firm finds its data providers, he says, Bond Connect will go live with coverage of munis.