Boundaries Blur as E-bond Platforms Expand

February 26, 2007
Shane Kite
Correspondent

In the beginning of the Internet bond trading era, about a decade ago, fast-moving technology pioneers would stake out a well-defined piece of product or market turf, letting others do the same in other parts of the vast fixed-income territory. But growth and maturity have changed all that: Consolidation has left a relative handful of strong survivors, which are grabbing for more land, blurring the distinctions between market segments and intensifying the overall level of competition.

Thomson TradeWeb, for one, expanded from its core institutional customer base and moved into the retail segment last July with the acquisition of LeverTrade, owner of the BizBonds.net system. BondDesk Group, which served brokerages' retail needs across a wide array of municipals, corporates, governments and other securities, launched an institutional initiative last year. NYSE Group is planning to phase out the New York Stock Exchange's Automated Bond System in favor of NYSE Bonds, also with a retail orientation and scheduled to launch in March.

Publicly traded MarketAxess Holdings has entered the interdealer space and is adding trading of lists of credit default swaps (CDS) from single issuers this quarter; it, like TradeWeb, has been trading CDS indexes since 2005. Italy-based MTS Group, whose multidealer BondVision platform is focused largely on European government debt, started handling U.S. Treasuries in February 2006. ValuBond struck a deal in September with Bloomberg to offer users of Bloomberg Trade Order Management System access to ValuBond's retail, odd-lot inventory. The first customer went live on Jan. 9.

The platform providers are, in a sense, only following their most important institutional customers--prime brokerages and hedge funds and others on the buy side--for which multi-asset-class and cross-border investing and trading are increasingly the norm. The industry is also bullish on retail, seeing the aging of the baby-boom generation as a cue for less-risky, fixed-income portfolio strategies. While liquidity is expanding, the push to reduce operational risk in the derivatives market has prompted providers of fixed-income platforms to offer processing solutions.

"America's largest securities market is rationalizing," said John Pigott, chairman and CEO of Atlanta-based ValuBond, which is a distributor of broker-dealer inventory that offers odd-lot retail bond trading and that was acquired in July for $18.2 million by Knight Capital Group of Jersey City, N.J.

"Every exchange in the world is trying to become a multi-asset-class trading portal," Pigott said. "That includes the big institutional markets, with round lots of $50 million and up, and the retail end of the market, in which the average trade is about $46,000 in par value. There's a big gap there. So we're going to see the models moving toward each other."

All this action has attracted investment capital into these innovative providers. In addition to the ValuBond buyout--Knight this month finished the migration of ValuBond's systems into its data centers, as it has previously done with the Hotspot FX currency trading platform it bought in April 2006 for $77.5 million--BondDesk was purchased in August for an undisclosed sum by Boston private equity firm Advent International. Robert Slaymaker, CEO of Mill Valley, Calif.-based BondDesk, said that "eight serious bidders" conducted due diligence before Advent won out.

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