Whither Fixed Income Trading Platforms?

Terry Flanagan

Electronic fixed income trading platforms are no longer springing up like mushrooms after a rain, as they did in late 2014 and early 2015.

Nor are the operators closing up shop or desperate for consolidation, as anecdotal reports suggest that even the newer, independent startups are keeping busy.

“I would characterize the business environment as stable and healthy,” said Russell Dinnage, lead consultant at London-based GreySpark Partners. “There’s a consolidation narrative going around, but I’m not entirely sure it’s true.”

“The market for these platforms as a whole in terms of the competitive space is in a wait-and-see phase, in the sense that many are still developing and testing their trading models with various types of market participants to see what works and what doesn’t,” Dinnage told Markets Media.

According to Dinnage, 42 electronic corporate-credit trading platforms launched since 2007, and only four no longer exist; Goldman Sachs, Citigroup and Deutsche Bank each shut down a platform, and Vega-Chi was purchased by and assimilated into Liquidnet.

Bondcube, which Dinnage categorized as a software provider rather than a trading platform, filed for liquidation in July 2015. From reading press coverage of the sudden shutdown, one would have expected more failures in the ensuing eight months, but instead it has been quiet.

“The space is doing well,” Dinnage said. “There hasn’t been a continuance in the explosion of new platforms, but that doesn’t necessarily mean that the platforms that launched previously are struggling.”

Electronic fixed income trading platforms proliferated amid structural changes that fundamentally changed the way the buy side finds trade counterparties. Specifically, the Wall Street banks that historically shouldered the load as liquidity providers could no longer do so due to capital and regulatory constraints, leaving a yawning gap in the market.

No single e-platform can solve the liquidity problem, but market participants say that each one can serve as a piece to the liquidity puzzle.

The platform space has been “a bit mixed,” according to Dan Connell, managing director at Greenwich Associates. “It’s too soon to say we’ve hit the finish line, because there are still some developments yet to come, and no one would say we’re at the end of the regulatory changes.”

Established fixed income trading-platform operators include Bloomberg, MarketAxess and Tradeweb. “We’ve seen the big guys that have market share, continue to hold onto that market share,” Connell said.

Regarding some of the newer players, “we hear that TruMid has gained some traction and has some volume. They have a lot of voice skills in their organization, so they naturally will take advantage of that skill base,” Connell said. “Electronifie is more of a pure electronic play. We see them getting noticed more. Liquidnet continues to boast about significant volume growth on their platform. We’ve heard some good things.”

To be sure, it’s not great guns and exponential expansion for new and emerging fixed income trading platforms. Year-over-year growth numbers are decent, but comparables are off a low base that remains a modest part of the market.

The institutional buy side is slow to adapt to change. “Once a relationship is established, be it a personal relationship or electronic relationship, systems are in, behaviors are learned, and if you’re getting good execution, why change?” Connell said. “Human nature is, we resist change. The buy side is certainly in that category.”

Another reason for the gradual pace of change is the enduring value of the human sales trader. “It’s much more than pricing and execution,” Connell said. “It’s market color. it’s research. it’s workups. It’s access to new issues. There are a lot of things that go into the value of that high- touch relationship, and that’s not going to change anytime soon.”

Dinnage noted that up until now, the wheelhouse of electronic trading platforms has been  facilitating retail and odd-lot-sized fixed income trades. The holy grail is to move up the food chain, to handle institutional block transactions.

While that part of the problem remains unsolved, SIX Corporate Bonds and Liquidnet show promise. “They’ve demonstrated that it can be done,” Dinnage said. “There is appetite to do block-size corporate credit trades, electronically on a platform, involving both sell-side and buy-side counterparties.”

Featured image by mrhighsky/Dollar Photo Club

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