Fixed Income Entrepreneurship Blooms

Terry Flanagan

Regulatory changes and technological advances are pushing fixed-income markets from stodgy and static, to dynamic and entrepreneurial.

The sea change has been new regulation that has constrained ‘Bulge Bracket’ balance sheets to the extent that big banks are no longer the go-to corporate-bond liquidity provider of the buy side. That has given rise to a plethora of start-up bond-trading platforms, each with their own blueprint for how they’ll be a piece of the liquidity puzzle.

“A lot of attention has been devoted to trying to figure out which of these solutions can gain traction, where the added value is, and whether they are adding additional complexity because of too much choice, too much fragmentation, and no single trusted venue of choice,” said Will Rhode, director of capital markets research at Boston Consulting Group. “A lot of people have tried to come up with answers to these questions.”

About two dozen electronic bond trading platforms have launched over the past half decade, and there were another eight with launch plans on the drawing board as of February 2015, according to GreySpark Partners. The founders and principals of many of these emerging trading venues are expatriates from sales and trading desks at sell-side firms such as Goldman Sachs, Morgan Stanley and Credit Suisse.

Rhode will moderate a panel on Entrepreneurship in Fixed Income at Markets Media’s Fixed Income Trading & Investing Summit in New York on May 5.

Wall Street execs who were either downsized or left on their own volition “have the experience in bond trading and they understand the mechanics, and they probably feel technology can be deployed to solve some of the challenges,” Rhode said. “Having an understanding of the business is critical, and if you can blend that with technology skills as well, that’s ideal. To really get a good job in an investment bank on the sales and trading force today, particularly on the trading side, you really want somebody that has both traded and is able to code, and this will be a requirement for the firms that are starting up these solutions.”

Will Rhode, Boston Consulting

Will Rhode, Boston Consulting

Bondcube, MTSBonds.com, Electronifie, OpenBondX, and TruMid are some of the newer electronic platforms that are competing, or will compete, to match orders.

Buy-side institutions that are ‘end users’ of the corporate bond market have taken notice. In a widely disseminated viewpoint piece published in September 2014, BlackRock said the new landscape needs to feature multiple electronic trading protocols, not just more of the same.

“While broader e-trading is certainly an important component (to improve market liquidity), without a concurrent change in the underlying trading protocols, this will likely result simply in a transfer of RFQ (Request for Quote) voice activity into the electronic execution environment — rather than truly broaden liquidity in a meaningful manner,” BlackRock said.

There are vast differences between fixed income and equities. “Equities trade thousands of times a day, and there’s only one listed stock per company, whereas in fixed income there are many fixed income instruments, and lot of them only trade quite infrequently. But while I don’t think fixed income markets will become more like equities, I do think that technology innovation is able to solve the existing fixed-income markets challenges that have been around for decades.”

Examples of digital innovations include data analytics, probabilistic matching logic, and even cognitive intelligence. “There’s a whole array of digital innovation that is occurring and that is accelerating,” said Rhode.

At BCG, Rhode has augmented his capital markets expertise with a growing appreciation for the role of information technology. “Currently we are focusing more and more on the nexus between capital markets and digital. It’s extremely exciting to see how that state will evolve as the two worlds come together.”

Compared to other industries, capital markets have been something of a laggard in adopting digital, but that’s bound to change, according to Rhode. “A lot of the traditional pillars that supported the capital market industry and enabled it to be resistant to digital trends, as opposed to what we may have experienced in other industries or even in our own personal lives, are being destabilized.”

Featured image by pathdoc/Dollar Photo Club

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