Securities Industry Outlook for 2008
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Interdealer Platforms Point the Way
Electronic fixed-income trading could see growth and consolidation
January 7, 2008
A flurry of announcements in the electronic bond trading sector late last year may provide signposts for the sector's direction in 2008, a year that could see further acquisitions as the fixed-income market continues to deal with the repercussions of the debt crisis.
According to analysts, the top interdealer brokers are in the best position to acquire fixed-income platforms, in part because market volatility has boosted many of the firms' trading volumes and revenues. Large exchanges, seeking product diversification, could also play a consolidating role.
NYSE Euronext is developing a trading platform for corporate and government bonds in the U.S. and Europe, with an anticipated first-quarter launch, though it is "at very early stages, exploring multiple avenues," according to exchange spokesperson Caroline Denton. She wouldn't say whether the trading will be over the counter or on-exchange or if it will be linked to NYSE Euronext's "central order books that already exist."
Already on the fixed-income side, the exchange has NYSE Bonds, an odd-lot platform it relaunched in April, and LuxNext, a partnership of Euronext and the Luxembourg Stock Exchange aimed at developing a listing standard for corporate bonds in Europe on Euronext's NSC platform. Luxembourg lists more than 26,000 international debt securities, the most in Europe, according to the Federation of European Stock Exchanges. All of Luxembourg's securities were migrated to NSC in April.
London-based interdealer brokerage Icap, which runs the electronic BrokerTec system, wants to buy Italy's MTS group of bond trading platforms from the London Stock Exchange (LSE), which on Oct. 1 merged with MTS parent Borsa Italiana. But MTS is not for sale, much to the chagrin of Icap CEO Michael Spencer, who reiterated his interest in the unit in an interview last month with Reuters. LSE chief executive Clara Furse in June, when the tie-up with the Italian exchange operator was announced, told London's Daily Telegraph that "we're well aware of the fact that MTS is much coveted, and obviously we covet it too."
NYSE Euronext sold its $136.7 million stake in MTS to Borsa Italiana, which exercised an option to buy the shares triggered by the merger in April of Euronext and the New York Stock Exchange.
"I think exchanges are evaluating their strategy in the fixed-income marketplace," says Andy Nybo, analyst at New York-based research firm Tabb Group. NYSE Bonds "has not seen a lot of volume. But the one product set that the exchanges have not really moved into is fixed income. It's an area to watch."
Bond trading requires dealer support, adds Nybo, and it remains to be seen whether any of the exchange initiatives will attract the required liquidity.
"Exchanges will get into fixed income because they need to get into other product sets," says Tom Price, analyst at Needham, Mass.-based TowerGroup. "The private venues are going to eat their lunch if they don't. But it's where the liquidity goes. And although they offer transparency, the exchanges have not been able to attract liquidity. [NYSE Bonds] in its current state is nothing more than another odd-lot platform."
Price foresees bond players making stronger international moves this year, potentially into emerging markets like China and India, as regulatory regimes there loosen and modernize.
Interdealer brokers could make significant acquisitions, says Price. "It's a question of who's got any money, and who's got an appetite for spending it," he notes. "Icap is very acquisitive: EBS was a great acquisition, really propelling them into the forefront of interdealer FX," Price says, referring to the broker's purchase in June 2006 of the EBS foreign exchange platform. New York-based GFI Group has also expressed its desire for near-term mergers.
