As buy-side professionals peer into 2004, their crystal balls seem to be telling them that two major issues facing the fixed-income industry will be online-bond-trading platforms expanding into new products and tackling back-office problems.
Rather than place their bets on industry consortiums, institutional-portfolio managers expect the two leading electronic-trading platforms to deliver the goods.
Buy-side traders speaking at The Bond Market Association (TBMA) Fixed-Income Summit and Expo on Technology and Electronic Trading in November called for adding more products to the e-trading platforms. "For us, the best thing is to get more products on your platforms," says Curt Hollingsworth, head trader at Fidelity Investments. He cites four assets: re-purchase agreements (repos), municipals, certificates of deposit and structured products.
Will more e-bond trading systems enter the market in 2004? Judging from the comments of buy-side traders and portfolio managers, the answer is no. "For any one trader, I wouldn't want to see more than two [systems]," says Hollingsworth. "We think the competition between MarketAxess and TradeWeb is very healthy," he adds. Indeed, the industry can expect to see more head-to-head competition between TradeWeb and MarketAxess this year.
"The next big thing that is going to shake up the electronic-trading scene is that TradeWeb is going to move into corporate [bonds] in January," says Neal Rayner, vice president at Deutsche Asset Management, which is active in fixed-income trading and located in Philadelphia.
Though TradeWeb added callable agencies last year, Rayner says that's more like a baby step, because it's within the same asset class it already dominates. "It's no different than selling hamburgers and selling cheeseburgers," he says.
While TradeWeb has been very good at expanding its platform to carry the most commodity-like securities, such as Treasuries, agencies, mortgages and commercial paper, the next step will be to move into corporates. "I'm sure they'll be starting off with the big corporates first, before they move down into less liquid issues," speculates Rayner.
On the other hand, MarketAxess has already concentrated on the corporate-bond market. "They have good breadth of market both in investment grade and high yield. That takes a longer time to become powerful in," says Rayner.
Back Office is Burning Issue
While buy-side traders clearly want the two major platforms to continue to build liquidity in other fixed-income products, solving the back-office conundrum seems to be the burning issue going forward.
"The next question is back office and STP and settlement and the efficiencies that come with that. That's probably the next thing that is going to cause major demand shifts again," says Tim Sangston, principal at Greenwich Associates in Stamford, Conn.
He suggests that demand for electronic fixed-income trading is reaching a plateau or could be slowing down. "New technology solutions pertaining to the back office could be another agent for continuing growth or another surge in demand," says Sangston.
"Anyone involved with electronic-trading systems has to take [STP] into consideration," says portfolio manager Tom Girard, a managing director at Weiss, Peck & Greer in New York, whose firm manages $19 billion in assets of which $14.5 billion is in fixed income.
Girard defines straight-through processing as the ability to trade on an electronic system, allocate the trade into an account and send the trade to the back office, which would link to the counter party's back office for settlement. "The ability to do STP kind of streamlines that and keeps the process in an electronic mode, which helps eliminate errors," says Girard.
Both platforms are addressing STP, says Girard, but it's something that will evolve in the coming years because it's difficult to do. Girard uses both TradeWeb and MarketAxess.
What aspect of STP should the bond-trading platforms tackle in 2004?
A survey of major broker/dealers, asset managers and custodians conducted by the STP Advisory Group, an industry group organized by TradeWeb, ranked block-trade confirmation and allocation processing as the top priority for fixed-income trade-processing automation.
In past years, the bond industry thought that the virtual matching utility (VMU) concept, such as that of the Global Straight Through Processing Association or Omgeo, the joint venture between the Depository Trust & Clearing Corporation and Thomson Financial, would handle confirmations and allocations. However, with the GSTPA now defunct, the only option left is Omgeo. As a result, TradeWeb and MarketAxess are getting into the game.
"The advantage that a trading platform has is that they are a neutral arbiter of the trade," says Mike Wyne, managing director, Fischer, Francis Trees & Watts, who is on the STP Advisory Group. "The buy side might think that they bought 10 million bonds at a price of 100 while the dealer firm thinks that they sold the bonds at a price of 100 2/32. The trading platform would be a definitive source for verifying the actual price," he says. "That's what's so intriguing about this."
Buy-side institutions are looking to the electronic-trading systems to solve the STP problem, which is a different model than the VMU, says Wyne. On the other hand, sources say that the power of the VMU model shouldn't be discounted. Omgeo is still a very viable candidate, notes Wyne. "Thomson owns the equity-allocation market through Omgeo. There is no real equivalent in the fixed-income market, unless FIX steps in," says Robert Hegarty, vice president of TowerGroup securities and investments, citing the Financial Information Exchange protocol. Release 4.4 of FIX contains comprehensive support for fixed-income securities and allocation messages and could help process bond trades.
Since both TradeWeb and MarketAxess are still evolving their STP solutions, and FIX is new to fixed income, no one is sure how this will turn out. By the end of 2004, Wyne predicts that it will become clear which institutions have selected the e-bond trading systems for matching allocations and who's bought into the Omgeo VMU model.
Buy-Side Predictions for 2004
- Bond-trading platforms will carry analytics to use with NASD's TRACE.
- TradeWeb and Bloomberg will follow MarketAxess by using BondTicker.
- Credit default swaps will move onto e-bond trading platforms over the next two years. Credit default swaps are not yet communicated to the NASD. But if they were, TRACE could give investors information on where credit default swaps were trading.
- Look for the FIX protocol to play a role in allocations. Establishing a reliable database for delivering settlement instructions will be a priority.
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