In 1997, the Bond Market Association reported there were 11 electronic trading systems operating in the U.S.; one year later there were 26, with at least two more slated for start-up in the last half this year. It looks like the fixed-income markets will never be the same. While combined U.S. fixed-income trading reached nearly $80 trillion in 1997, industry analysts predict 10% of this volume will be traded electronically by the year 2000. The latest estimates indicate that about 2% to 5% of fixed-income trading (corporate and Treasuries) is now done electronically on a daily basis. One company estimates that about $50 billion in corporates alone are traded daily. One reason why some of these figures are difficult to isolate is that many of the new systems have contractual obligations with their customers, mainly primary dealers, which prohibit the disclosure of their trading activity, including dollar figures.
The one system that does disclose its dollar volume, TradeWeb, a multi-dealer consortium that includes offerings from Credit Suisse First Boston, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Salomon Brothers, reports it is doing about $1.5 billion - $2 billion in daily transactions, according to Jim Toffey, president.
Toffey says the firm trades from the smallest increments to $100 million to $200 million blocks. There are nine major market makers in the system, including Deutsche Bank, JP Morgan and Barclays, as well as 180 major institutional investors who participate by trading with their dealers. "The way our system works is that if an institution wants to sell $50 million of an issue, they can then select the dealers who they want to participate in that trade," Toffey said. Within 15 seconds, the institutions can get an auction situation for every trade they want to buy or sell, he said.
"For what we do, we are the biggest," said Toffey, who ran First Boston's bond trading system from 1992-1997. "When I was at First Boston, I saw that customers wanted a simultaneous auction system environment, and the best way to provide that liquidity was to get multiple market makers to commit capital to create a live market. We have done that electronically with TradeWeb," he said.
Since the first systems began, electronic fixed-income trading has developed a slow, but steady following. The basic attraction was cheaper transaction costs, faster executions, better transparency and easier consolidated reporting. And because many electronic systems were either co-developed or integrated into existing operations of major fixed income trading firms, care was taken so that the systems did not alienate the powerful institutional sales forces that traditionally fostered client relationships.
But there was also a growing restlessness on the client side for a better, more efficient way to trade. In a 1997 survey conducted by the Bond Market Association, 75% of respondents believed major institutional investors would demand access to an electronic fixed-income trading system within two years. Since this most recent study was completed, P. Anders Nybo, vice president of market statistics, at the Bond Market Association, New York, said that prediction seems to be materializing.
What the systems offer
While single dealer, wholesaler distribution systems have been operational for over a decade, current ones offer multiple-dealer access in instrument ranging from top-rated U.S. Treasury securities to lesser-rated fixed-income instruments.
Trading can be done in cross matching, dealer, competitive bidding auction and direct issuance systems. Each can offer informational or strategic benefits, as well as expedited transactions in the primary and secondary markets.
In large part to the increase in Internet use, the usability of these systems is now becoming more familiar to a wider audience. As a result, there is even a new emerging category of online retail brokers that allows customers to research and purchase bonds in real-time via the Internet. This is a step forward from other "online" brokers that allow customers to only research and see price displays via the Internet, but must then call a broker to make the actual transaction.