10.25.2012
By Terry Flanagan

Vega-Chi Launches Buy Side Only U.S. Junk Bond Platform

Vega-Chi US has launched its high-yield bond trading platform for institutional investors, with the electronic marketplace being supported by over 40 buy-side participants with more than 60 firms in the pipeline to join within the first few months of trading.

“It’s an electronic exchange dedicated to high-yield bonds and serving institutional investors, who now comprise the bulk of liquidity in the high-yield fixed income market,” said Constantinos Antoniades, chief executive of Vega-Chi, an operator of electronic bond platforms.

With dealer corporate bond inventories down by almost 80% since 2007, institutional investors are actively seeking new sources of fixed income liquidity.

“The credit markets are facing unprecedented regulatory and capital challenges,” said Brad Golding, managing director at Christofferson Robb, a New York-based asset manager, in a statement.

“By directly sourcing liquidity from buy-side participants, Vega-Chi will provide institutional investors with superior pricing. Ultimately, this should be all-around good news for the industry.”

After the financial crisis, proposed regulatory changes 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.

“Liquidity from banks is but a fraction of what it once was due to the Volcker Rule and other regulatory changes,” said Antoniades. “Institutional clients are not getting the liquidity they need from the sell side, and therefore want to be able to trade with each other directly and anonymously.”

Vega-Chi launched a multilateral trading facility in Europe for convertible bonds in 2010, followed by a high-yield/subordinated bank debt platform in Europe earlier this year. The European platforms have approximately 100 participant buy-side firms.

The service is highly appealing to the U.S. retail brokerage community, and with U.S. demographics favoring more fixed income holdings, it could prove popular over time, according to a recent report by research firm Celent.

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

Goldman Sachs has launched G-Sessions, which holds twice-weekly auctions, and Morgan Stanley is planning to launch a similar service, called Bond Pool.

The Vega-Chi system is available to institutional investors only, and has no upfront or on-going costs for use, the company said.

Participants are charged a fee ranging from three cents to 6.25 bond cents each time they execute a trade on the platform, considerably less than the typical bid/offer spread in the over-the-counter market, according to Vega-Chi. The system uses the same technology that has been used by the company’s European high-yield and convertible bond platforms for almost three years.

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