Talking Shop with CEO of Bond Book John Kim
WS&T: So you have discussed buy side involvement with the firms and they plan to trade on the system?
Kim: Yes, they have been and will continue to be actively involved. These are the largest and the best of the money managers.
WS&T: Bond Book is also acting as a credit facility for the system? How does that work and why is that important for the system?
Kim: Bond Book is anonymous in nature and will therefore act as the counter party to trades. So they will see Bond Book as the buyer and seller effectively. For example, if Putnam wanted to buy $100 million of Ford Motor credit and the seller of that happens to be Salomon Brothers, then Bond Book would actually take the bond from Salomon Brothers and settle it. The purchase would go through our settlement facility and settle without Putnam or Salomon Brothers knowing the other side of the transaction. Broadcort a subsidiary of Merrill Lynch will provide clearing on the system.
WS&T: Some bond trading systems have private negotiating rooms, but yours is completely anonymous, why is that important?
Kim: The credit intermediation piece is critical for anonymous trading. Say Putnam wanted to trade with Fidelity today, they would still want to go through a dealer, principally because the dealer has done the credit work on both companies and would sit between the two parties. There is a confidence level that the trade is going to go through and get done. In having an anonymous system there needs to be the same level of confidence in which that credit intermediary is going to be.
WS&T: Will other participants be able to see the transactions?
Kim: Yes, but they won't be able to see who is transacting. That's how equities are traded now and when the marketplace sees the real transactions being bought and sold there is much greater confidence as to the fact that that's a market price as opposed to hearing it after the fact, privately through a dealer or a buy side firm. Bond Book is going to allow even two buy-side firms to trade with each other and not have to go through a specific dealer. They will go through a credit intermediary in the form of Bond Book but they will not have to go through a dealer. That's really never happened.
WS&T: Some have said this is a closed model or a country club system, will it truly be open to anyone who wants to participate?
Kim: This is definitely not a closed model. Bond Book is as pro-competitive as you can get. Because we are assuming a counter party risk, we are going to have standards for both the dealer community and the buy- side community in terms of credit worthiness and the like. That will be part of our due diligence process. The full extent of the success of Bond Book will only be achieved when all of the dealers and as many of the buy side institutional money management firms participate in this in a full market or exchange orientation.
WS&T: What about if Bond Book goes public and the five original dealer equity shareholders make a lot of money, will their profits affect the buy-side confidence in the system?
Kim: No, not at all, the buy side should be less interested in the possibility of an IPO and more concerned about what the system actually does for them---providing more liquidity and price efficiency and the like. We expect those things will happen and as a result we expect that Bond Book will be successful. And if we choose to do an IPO and make some money off of that, it's more power to us. I don't think any of the buy side firms have any problems investing in companies that have been financially successful.
WS&T: Why don't any of the buy side firms have an equity stake?
Kim: There is no restriction per our LLC but we have chosen not to involve the buy side firms in the equity stake at this point.
WS&T: Is there any specific reason why not?
Kim: No, no specific reasons.
WS&T: In the future will Bond Book be considering linkages with other fixed-income trading systems?
Kim: We have a business plan that does contemplate expansion, not only in products, but also geographically. In the next 100 days my focus is to make sure that we get secondary, high-grade corporate trading up and running to the success and satisfaction of all of our participants. After that, I think the quickly emerging marketplace will tell us what our next opportunity is.
WS&T: Have you thought about linkages then?
Kim: Yes, the plan could certainly include linkages.
WS&T: I understand you have been contacted by the Department of Justice for information relating to Bond Book. What is happening with the investigation?
Kim: We are providing information and responding to the inquiry, and are veryconfident that this will resolve itself favorably. Bond Book promotes competition through an open, anonymous exchange-like environment. We feel a careful study of the issues will come to the same conclusion.
WS&T: Looking forward, how do you see the overall electronic fixed income market evolving?
Kim: We expect that the whole fixed-income trading market will consolidate, that there will be winners and losers and we certainly expect to be one of the winners. We also expect that the investment community on both the buy and the sell side will rapidly accept and endorse electronic fixed-income trading and in turn there will be greater activity done electronically. We expect both of those trends will benefit the Bond Book initiative.
WS&T: What will make a successful trading system as consolidation happens?
Kim: You have to have the right platform and then you have to have the liquidity to be successful. The combination of those two will dictate who the winners are.
Tweet This