MTS Faces Looming Threat to Dominance in Government Bonds
February 11, 2008
The Italy-based MTS group of fixed-income platforms--long dominant in the interdealer, electronic trading of European government bonds--is facing growing competition as multiple countries are opening up trading to competitors.
Belgian and Dutch regulators have told broker-dealers they may provide liquidity on other interdealer platforms, as long as the brokers and platforms fulfill certain criteria. Several other countries are expected to follow their lead.
The Dutch State Treasury Agency (DSTA) last week released the liquidity and market-making requirements that dealers must meet to use other trading platforms for bonds issued by the Netherlands government. Meanwhile, the Belgium Debt Agency has approved Icap's BrokerTec system and an eSpeed-powered platform from Cantor Fitzgerald's BGC Group for secondary market-making in Belgian government bonds.
"The first day primary dealers in Belgian government bonds will be able to officially meet their obligations on our BGC platform is March 3," said Florencia Panizza, a spokesperson for New York-based Cantor Fitzgerald. "Though Belgium is the first to do this, we are also looking to offer access throughout Europe as competition increases and other countries consider going the same route."
Cantor Fitzgerald trading technology spin-off eSpeed and its BGC interdealer affiliate are merging to form BGC Partners, a process they expect to complete this quarter.
Candice Adam, spokesperson for London-based Icap, deferred to comments by the Belgian Debt Agency's director of treasury and capital markets, Baudouin Richard, who told Reuters on Jan. 28 that "early March" was the target date for dealers to be able to start trading the Belgian bonds on BrokerTec.
Europe's primary dealers and some of the interdealer brokers have told regulators that fostering competition would prevent the cost of trading, data and services from ballooning. MTS has been the preferred platform for European government issues for years--some European Union members explicitly require that dealers use MTS. Since 1999 it has been the only platform on which dealers could trade Dutch government bonds.
Centralized Liquidity
In the early years of e-trading, European regulators and market makers tended to support MTS as a way of centralizing liquidity and avoiding fragmentation. The regulators have promoted transparency by requiring dealers to continuously quote prices on a platform or exchange, though exchange-traded bonds have yet to take off.
"BGC has been an active participant in the lobbying for, and shaping of, these changes and is pleased to offer clients a choice in terms of hybrid brokerage services, innovation, cost and governance," said Jeffrey Hogan, director of business development at BGC. "Offering the primary dealer community a series of options via which to trade these securities will spur volume acceleration, ensure a continuation of transparency and sow the seeds for product enhancements going forward."
Hogan noted that European government bonds "have suffered in recent years from technical isolation and a narrow business model. BGC is confident that the onset of free choice, competition and innovation will be positive for both issuers and the primary dealers who serve them."
What has not changed is the method of market making. Primary dealers will still be required to provide continuous quotes of government bond prices--which can be hit or lifted during trading hours in the secondary market--to be eligible for the governments' primary-market auctions.
