OpenBondX, an electronic fixed income ATS scheduled for launch this quarter, seeks to provide buy-side and sell-side participants fair and equal access and transparency with prudent risk management.

Most trading platforms are dealer-controlled or dealer-biased, with dealer-to-customer, dealer-to-dealer and single-dealer models, said OBX cofounder and CEO Alistair Brown. “This limits fair and equal access as well as transparency and price discovery. OBX allows all participants to trade directly with each other without the typical restraints and costs of dealer intermediation. Our platform offers full anonymity between all participants, so no one’s ‘hand’ is ever exposed.”

OBX has developed a hybrid bond trading protocol that addresses the disadvantages of such existing trading protocols as Indications of Interest (IOI) and dealer-to-client and dealer-to-dealer Request for Quote (RFQ). Called RFFQ, or Request for Firm Quote, the protocol enables participants to efficiently tap into hidden prices and competing quotes in an auction-like manner.

Initiators of an RFFQ specify the issue, size, side, limit price and order time limit, with the option to display only a portion of the order quantity (similar to an “iceberg” order type). Once risk checks are satisfied, the order is broadcast to all subscribers, without the price visible. Participants can respond until order expiration with a price for the displayed size—or even a larger quantity—potentially unleashing more liquidity.

Large sell-side banks have historically been the primary liquidity providers in the bond market. Tighter regulatory capital rules have caused corporate bond dealers to slash inventories by about 70% since 2008, and consulting firm GreySpark Partners estimates that buy-side firms held 96% to 99% of U.S. corporate bond inventory in 2014.

“OpenBondX intends to encourage many of these providers to increase liquidity on the platform thus exposing orders to the most aggressive pricing,” said Brown. “This can only help to satisfy the fiduciary duty of institutions seeking the best price.”

By automating the bond markets and attracting liquidity from non-traditional providers, the OBX ATS will drive true two-way markets and significantly reduce trading costs, according to Brown.

“Unlike existing quote-driven ATSs, OBX will be an order-driven market with special order types that enable participants to tap into hidden prices,” he said. “The buy side easily can discover liquidity and trade directly with one other, perhaps for the first time ever.”

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