Deutsche Börse Moves on Bond-Market ‘Electronification’

Terry Flanagan

Deutsche Börse, the German exchange operator, is making an investment in the increase in electronic trading in fixed income markets by purchasing a stake in a system which helps buyside firms to execute large orders.

The exchange said in a statement that it had acquired a minority stake in Bondcube, a London and Boston-based electronic fixed income trading system, for a single digit millions of pounds.

Paul Reynolds, chief executive of Bondcube, told Markets Media that he and co-founder Mark Germain came up with idea for the system in October 2012. Since then they have been marketing the platform and expect to begin trading in September this year.

Reynolds said: “The financial crisis was five years ago but fixed income trading is profoundly broken for buy-side firms who need to execute large orders.”

He said orders of less than $250,000 are very easy for the buyside to execute, and have doubled in volume since 2008, while large orders of more than $1m have become very difficult. In addition large orders have become more important as the size of bond issues have grown. For example last year Verizon Communications sold a record $49bn bond, overtaking Apple who had issued a $17bn bond earlier in 2013.

Reynolds worked as a credit trader at Deutsche Bank between 1998 and 2001 where he helped develop the bank’s Autobahn electronic trading platform for fixed income. Between 2003 and 2008 he worked at UBS Investment Bank and then introduced a fixed income trading platform at Amias Berman, an agency broker and fixed income capital markets advisory and origination firm,that allowed buyside firms to put firm bids and offers on Bloomberg ALLQ.

Bondcube has some of the characteristics of dark pools in equity market but Reynolds described the system as a “twilight pool.” The system is open to both fund managers and banks who can deal with each other without restriction.

“All Bondcube liquidity is based on genuine intentions to negotiate a trade. Unlike existing systems designed fifteen years ago there is no request-for-quote functionality,” said Reynolds.

If two buy-side firms negotiate a match their identities remain anonymous, but if a fund manager and bank agree a trade their identities become known to each other. They negotiate through chat forums within Bondcube that are “encrypted in motion” and only decrypted to be displayed to a user or for audits.

On Bondcube participants can see historical traded volume for each bond, which is difficult to find according to Reynolds, the most active traders and historic orders that have not been filled. “You might suddenly find that a trade you had entered two months ago for a bond that only trades once every six months has been filled,” Reynolds added.

If two buy-side firms negotiate a match They have to cross the trade through a sellside firm who checks that the price is correct. Bondcube is free for fund managers but banks receive a fee for crossing a trade, and renting their balance sheet during the settlement period, and banks pay a connection fee to Bondcube. Reynolds said: “Banks see Bondcube as a revenue source rather than as a competitor.”

To prevent information leakage, firms looking for a match can choose who they want their messages send to and also see the behaviour of respondents.

“Each client has a domain or window display and can see who visits, how often, what they do and can bar them if necessary,” Reynolds added. “Every action is recorded on a firm’s profile so people can see if they look at a lot of things but never trade. We are combining the features of reducing trading inefficiencies with the functionality of social media in rating conduct.”

Bondcube is delivered over the web and data feeds are based on industry standard FIX protocol.

Christophe Mianné, chairman, of Newedge said in a blog post this week: “The trend for fixed income markets to become more equity-like is now firmly established. Regulatory pressure has helped to accelerate migration towards electronic platforms and to undermine fixed income revenues at many banks, both big and small.”

This week MarketAxess, the bond-trading platform, also introduced an index which measures liquidity in the bond market in Europe in response to the decrease in liquidity since the financial crisis in 2008.

The US Securities and Exchange Commission warned in a report last month that primary dealer capacity in the US for corporate bonds appear to be at an all-time low, relative to the market size, with holdings of approximately $50bn (0.5% of market size) compared to a peak of approximately $250bn (4% of market size) before the financial crisis.

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