Euronext and Algomi Look to Deepen Bond Liquidity

Shanny Basar

Euronext, the pan-European exchange, is investing in a joint venture with fintech firm Algomi to improve corporate bond liquidity as the fixed income market reshapes ahead of the MiFID II regulations in 2018.

The exchange said in a statement today that it is launching a 10-year joint venture with Algomi, which provides a bond information network. The pan-European exchange is investing $2.3m (€2m) in the joint venture so it can use Algomi’s technology for a new multilateral trading facility owned and operated by Euronext.

Dealers will be able to access the trading interface either directly through their existing Algomi technology or their stand-alone systems. The MTF will use algorithmic smart matching processes to create an auction between dealers to improve liquidity and search for best execution.

When Algomi launched it built internal networks for banks to connect together staff who could help transact less liquid corporate bonds but the firm has since added asset managers to its Honeycomb network so they can easily and quickly find the best bank to execute large trades.

Brad Bailey, research director, securities and Investments group at Celent, a division of consultancy Oliver Wyman, said in an email to Markets Media that this is an example of collaboration between a fintech solution and a market incumbent. “The fintech provider bringing an alternative business model, utilizing data in new, and innovative ways, and an incumbent exchange, with scale, distribution, regulatory expertise and capital,” he added.

In a report in September Bailey said the fintech disruption in banking is ready to hit capital markets.

“For the brave incumbent firms who are providing capital and nuanced expertise to these innovators, they are being rewarded with new ways of looking at their business, but more importantly, ready built solutions that they can scale,” wrote Bailey. “Overcoming the fear of engaging these firms effectively is a path to finding better and more cost-effective solutions.”

He added that as electronic trading has grown, clients want tools and services to aggregate liquidity from all available sources, as well as flexible market structure models in order to ensure best execution and greater access to data.

Bailey told Markets Media that the joint venture between Euronext and Algomi makes a lot of sense at they each bring key components to creating an alternative model for sourcing fixed income liquidity. “This also makes sense in the run-up to MiFID II as both the sellside and buyside are remapping their fixed income execution and trading workflows,” Bailey added.

MiFID II, the regulations covering financial markets in the European Union from 2018, sets new pre-trade and post-trade transparency requirements for bond markets.

In September Algomi said it had more than 200 fund managers on its network. There were more than 10,000 buyside indications of interest, with an average size of more than $7m, covering $75bn of live buyside volume. Mark Ledwards, head of exchange and data solutions at Algomi, said in a statement that existing data from its Honeycomb network suggests that over 40% of less liquid indications of interest could benefit from being matched on the Euronext platform.

Paul Humphrey, head of fixed income, rates & FX at Euronext, said in statement: “Banks are under increasing pressure to de-risk balance sheet and hold less bond inventory. This platform will create huge network effects that will assist multi-located global sales and trading teams to identify the most profitable trades from the “market noise”.

Kevin McPartland, head of market structure and technology research at consultancy Greenwich Associates, told Markets Media: “Giving dealers new tools to seek out the liquidity they need to manage their own risk could allow them to provide more and better liquidity to end investors.”

Frederic Ponzo, managing partner at GreySpark Partners, said on the consultancy’s blog that regulations have slowed the velocity at which dealers can work risk off their balance sheets while there has been increasing supply and demand for corporate debt. Greyspark’s latest annual Trends in Fixed Income Trading report, published in June this year, said the Basel Committee’s Fundamental Review of the Trading Book proposals will make it even harder for investment banks to take risk.

“More specifically, FRTB – via the separation of the banking book from the trading book and via the prohibition of proprietary value at risk methodologies – firmly places the responsibility for any and all long-term financial markets risk-taking initiatives into the hands of the so-called shadow banking sector,” said Ponzo.

He continued that, as a result, the buyside needs to support new exchanges or exchange-like trading venues by taking on some of the market making functions previously carried out by banks.

“These so-called all-to-all trading models do not create new liquidity in an already shallow marketplace out of thin air,” Ponzo added. “But what all-to-all thinking is now threatening to succeed in doing is to quite simply empower the buyside to take advantage of the reality of its place in the post-financial crisis corporate credit marketplace as the holders of balance sheets capable of warehousing more risk than banks can now handle.”

The report added that that market participants are discussing how best to use new electronic trading venues and protocols. Ponzo gave the example of venues such as Liquidnet, MarketAxess or the SIX Swiss Exchange creating new tools so that axed, odd lots or round lots of bond liquidity can be exercised on a daily basis by both the buyside and the sellside.

The Desk’s Trading Intentions Survey 2016 found that the platforms currently most effective at sourcing liquidity were Bloomberg and then MarketAxess as a close second, followed by Tradeweb, Algomi and then Liquidnet. The Desk survey had 70 responses from North American, European and emerging market credit desks spread across 34 investment managers, with an aggregate of €15.4 trillion in assets under management.

Liquidnet, Algomi and Neptune were also first, second and third choice for the second year running as the platforms that traders plan to use. The Desk said: “It is worth noting that many of the most successful models are not those which aggregate actionable liquidity. The services provided by Algomi, Neptune and B2SCAN all focus on the use of information to support where to trade rather than offering a venue to introduce the platforms as with request for quote systems, or any auction or order book.”

Ponzo said: “In the end though, GreySpark believes that it is the shadow banking entities – especially those whose business models are not averse to risk-taking – that ultimately hold the key to a revitalisation of not only the corporate credit corner of the fixed income market, but for the fixed income market as a whole.”

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