Market Operators Eye Fixed Income

Terry Flanagan

Since the financial crisis, regulatory changes have made it more difficult for dealers to hold inventory. Two of the most influential were the Volcker Rule, limiting a bank’s ability to participate in proprietary trading, and Basel III, which increases capital standards for banks that hold risky assets.

“This is especially true now because interest rates are only going to go one way and as interest rates rise, the price of bonds will decline, and people are going to start selling their bond funds,” said Liquidnet CEO Seth Merrin. “As the issuance has gone up and the need for liquidity has gone up, the amount of capital has just collapsed. We’ve been looking at it for a number of years and we were not going to enter into a market until we figured out how we could make this market more efficient as we did in equities.”

Liquidnet, an institutional trading network, has entered the fixed income market with its acquisition of bond trading platform Vega-Chi. The partnership, subject to regulatory approval, will combine Liquidnet’s reach within the institutional investment community with Vega-Chi’s corporate bond trading platform and sector expertise.

“We want to create a Liquidnet for fixed income,” said Merrin. “This is no longer a dealer-facilitated market. There has to be a new alternative to being able to trade bonds. Vega-Chi thought about this way before we did, and they built the technology and they built the platform and they have the expertise.”

Electronic platforms in the cash fixed income markets include request for quote-based and order book-based dealer-to-customer models such as Tradeweb, MarketAxess, Bonds.com and Vega-Chi, as well as dealer-to-dealer platforms and single-dealer platforms.

“The Liquidnet acquisition of Vega-Chi is a first sign that a successful equity market operator is entering the fixed income marketplace which will help to further drive innovation in our industry,” said Michael Chuang, CEO and founder of iTB Holdings. “It is also a show of clear progression towards established players entering the space in order to help fend off a future liquidity crisis from rising interest rates.”

Initially, Vega-Chi’s trading platform will continue to operate separately from Liquidnet’s core equities business. The platform is currently available to all approved market participants who trade U.S. and European high yield bonds as well as European convertible bonds.

“In Europe, we have platforms for high yield and convertibles, and we’ll also be launching investment-grade platforms in both US and Europe later this year,” said Constantinos Antoniades, chief executive of Vega-Chi. “When we looked at what are the necessary ingredients to make the most competitive platform offering in the market, there was only one firm that could help us bring all the ingredients together, that was Liquidnet.”

Prior to founding Vega-Chi, Antoniades worked as a fixed income trader at Goldman Sachs for11 years and then worked as a fund manager. “One of the things that became very obvious as a buy side trader is that there has to be a better way for large institutional investors to access liquidity,” he said. “Everything has got a little worse in terms of the ability of large institutional investors to access liquidity. The genesis of Vega-Chi was on the back of what in 2007 appeared as an obvious need, which has become a lot more obvious since, with all the changes in the commercial models of the large banks.”

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