By Terry Flanagan

Dark Pools Emerge for Bonds

Dark pools and other types of trading markets are emerging for corporate bond traders who are looking for the anonymity combined with live, executable quotes.

Electronifie, a New York-based trading platform set to launch later this year, intends to unite institutional bond traders in its platform as natural liquidity suppliers to one another. Both market makers and investors will provide liquidity and route orders to the Electronifie trading venue.

Years ago, dealers had sufficient inventory to facilitate transactions, however, they often relied on outdated technology and processes that resulted in inefficient executions.

The impetus for the company came from the experience of its CEO, Amar Kuchinad, who worked at the SEC for 18 months after running part of Goldman’s flow credit trading business in the U.S. Some of the studies he performed for the Commission included reviewing the corporate bond and muni bond markets.

Amar Kuchinad, Electronifie

Amar Kuchinad, Electronifie

At the same time a lot of large asset managers were complaining of the lack of liquidity in markets, Kuchinad was observing a lot of crossable opportunities in trading data. Twenty percent of the transactions that occurred in 2012 were potentially crossable, where clients bought and sold the same security on the same day in the same size.

“To me, it seemed that it was an inefficient mechanism to use a telephone search to match these parties,” said Kuchinad. “Voice communication is asynchronous, and the fear of disseminating information in a way that moves the market restricts the amount of liquidity that people can provide. We think an electronic platform that allows people to give information to a conflict-free, independent entity that can then do matches would enable and generate a lot of liquidity and a lot of these crossable opportunities would come to fruition.”

TMC Bonds, an alternative trading system for fixed income, is preparing to launch a dark pool for round lots as well as an additional live trading platform focused upmarket to compete with Bonds.com and MarketAxess’ DealerAxess segment.

A liquidity crisis is mounting for buy-side corporate bond investors. Driven primarily by new regulatory capital requirements, dealers’ corporate bond inventory has shrunk by more than 75 percent since mid-2007, while institutional investors have increased their investments significantly.

Electronifie is working with investors to build a fair and open electronic marketplace for corporate bonds.

“We are looking to replicate the current workflow that exists in current corporate bond trading, so we are not disrupting that,” said Nicole Olson, chief strategy officer at Electronifie. “What we are disrupting is the model of the trading venue. We are looking to bring buy-siders together to bring liquidity to one another. It’s structured to be a safe place to trade.”

Electronifie’s execution mechanisms are designed to bring back block liquidity into the corporate bond market, according to Kuchinad. “We are developing an all-to-all anonymous marketplace that combines the price discovery of a continuous limit order book with session-based protocols that aggregate block-size liquidity.”

Feature image via iStock

Related articles

  1. Agency broker moves beyond execution to offer a broader suite of services.

  2. Algorithms have become more prevalent in the spot FX market.

  3. Congress Unlikely to Act on HFT

    QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.

  4. Breaking data silos is key to deploying automation beyond 'nuisance' orders.

  5. They can be used on quantum hardware expected to be available in 5 to 10 years.