MarketAxess, BlackRock Expand European Trading Alliance

Terry Flanagan

MarketAxess said it is seeing activity from European investors and dealers after extending its Open Trading alliance with BlackRock into the region’s credit markets this week.

BlackRock, the largest global asset manager, had launched the Aladdin Trading Network, a buy-side only bond trading system in 2012. However, buy-and-hold asset managers are not set up to make markets and BlackRock allied with MarketAxess’s network of more than 1,000 investor and dealers.

European market participants could already use Open Trading for US high grade, high yield, emerging market and US agency products but the platform is now also available for European credit products.

MarketAxess said in an email to Markets Media that approximately 3,000 Open Trading transactions were settled between European market participants last year for North American credit and emerging market products. “Since launching Open Trading for European credit earlier this week, we are already seeing activity from our European investor and dealer base,” the firm added.

More than 30 electronic trading platforms have been launched as regulations have forced banks to cut their corporate bond inventories while there has been record new issue volume. As liquidity has decreased fund managers have found it particularly difficult to trade large blocks.

Rick McVey, MarketAxess CEO

Rick McVey, MarketAxess CEO

Market Lists, the core protocol of the Open Trading suite, is an extension of the traditional request-for-quote inquiry. Participants can submit a traditional RFQ on a disclosed basis to a selected group of liquidity providers and simultaneously send an anonymous inquiry to the entire MarketAxess trading community. “Through this more open trading architecture, there is no restriction on inquiry size and we have seen trades of all sizes, including blocks, executed using Open Trading,” added MarketAxess.

MarketAxess argued that it has a proven model and said that last year 77,000 Open Trading transactions consisting of $38bn in volume were completed. There were twice as many trades in the fourth quarter of last year as in the last quarter of 2013.

“In 2014, MarketAxess clients received an additional 114,000+ responses to their anonymous all-to-all Open Trading inquiries. This is new liquidity that would not have existed without Open Trading and was only available by bringing together investors, dealers and other market participants onto a single all-to-all platform” added the firm.

Richie Prager, global head of trading and liquidity strategies at BlackRock, said in a statement: “The fixed income investment landscape has evolved more quickly than the market’s underlying structure for transacting, challenging buyers’ and sellers’ abilities to connect and transact and requiring investors to explore new avenues of liquidity to meet their needs.”

Prager was one of the authors of a paper by Blackrock last year which made four recommendations to improve corporate bond market structure. The paper said: “Greater use of “all-to-all” venues, including exchanges, clearinghouses, electronic communication networks (ECNs), and similar platforms would enhance liquidity by enabling greater market connectivity and centralization of liquidity than the current bi-lateral framework”

BlackRock said such venues already exist, such as NYSE Bonds, but have limited volumes and are not used to trade large blocks. This week SIX Swiss Exchange said it is launching a platform specifically for large corporate bond trades, and the London Stock Exchange and Deutsche Borse have also started their own initiatives.

BlackRock said that in addition to more “all-in-all” venues, there needs to be multiple electronic trading protocols – not just RFQs or a central limit order book.

“New e-trading protocols need to be developed that straddle the RFQ and CLOB divide, and these protocols need to be adopted by more market participants,” added the paper. “These new e-trading protocols will help alleviate some of the dependency on dealer capital, as they may bring some latent liquidity to the market.”

Standardization of some features of new issues such as issuing similar amounts and maturities at regular intervals would reduce the number of individual bonds and create a liquid curve for individual issuers.

Market participants also need to recognize the fundamentally changed landscape and adapt their behavior. BlackRock said investors should become price makers as well as price takers, issuers must begin to assess the benefits of standardization, and bankers should provide leadership in product innovation and structure debt offerings to improve liquidity.

The paper said: “Larger, more frequent issuers, particularly wholesale-funded banks that are also the leading debt underwriters, are natural parties to lead the market evolution.”

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