Electronic Bond Trading
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Retail Bond Platforms Excel During Debt Debacle
December 1, 2008
While institutional electronic bond trading platforms have faced decreasing liquidity in the current financial crisis--thanks largely to risk-averse sell-side firms--retail systems have had the opposite experience. Broker-supported retail platforms have reported that their volumes have doubled, tripled and even quadrupled in 2008.
Executives at the platforms point to several factors driving the growth. Brokers and banks, they say, are increasingly selling debt via retail channels to shave risk from their balance sheets, and investors are responding to a tough economy by gobbling up higher-quality fixed-income instruments. Meanwhile, the buy side is seeking liquidity in sectors traditionally focused on odd-lot inventory.
"From an industry perspective, firms are taking less risk on their balance sheets," says Tom Vales, CEO of TheMuniCenter, a New York-based platform that offers agency, municipal and corporate bonds, auction rate securities, CDs, medium-term notes and treasuries. "In taking less risk, they still need inventory to feed their distribution channels," he explains, which has been a boon to the retail platform operators. "By using us they can feed their channels, but they don't have to take the risk. Balance-sheet constraints have caused more firms to work on an agency basis."
Among the products showing the most growth are CDs and corporate and municipal debt. And officials at several companies note that U.S. Treasuries spiked in September, as panicked investors fled the stock market.
Knight BondPoint, TheMuniCenter and Tradeweb Retail each have roughly 30,000 executable bonds in their inventory, with some clients posting as many as 2,000 tickets daily. Mill Valley, Calif.-based BondDesk Group, a leader in transaction volumes, says its clients have access to 35,000 offerings and execute over 20,000 deals each day. NYSE Bonds, which NYSE Euronext launched in April 2007, replacing its Automated Bond System, has seen relatively little activity compared to its retail competitors but is hoping to benefit from the buy side's growing interest in odd-lot transactions.
Vales says that market volatility has encouraged an electronic approach--in an effort to stay up to date on prices and offerings, traders have put down their phones to consult their screens. "Volatility was so significant that the traditional voice brokerage way of following inventory was just too inefficient," he says. "Our traders are saying they are so busy now--in addition to having smaller staffs--that being able to post electronically has been a real asset." On Nov. 10, TheMuniCenter introduced a split-screen search mechanism that lets traders simultaneously view their blotters and available products.
Rise of the Regionals
"Retail has been relatively immune to the lack of liquidity that institutional markets have experienced," says Peter Adams, director of Tradeweb Retail, which offers municipals, corporates, agencies, CDs, mortgages, treasuries, reverse convertibles, and structured notes and CDs. Unlike their bulge-bracket brethren, regional broker-dealers have been a "bright spot" in the current environment, says Adams, "and we've benefited from that. Our customer base is primarily regionals."
Tradeweb, an institutional e-bond platform owned by Thomson Reuters and a group of dealers, in mid-2006 acquired the LeverTrade fixed-income technology platform and rebranded it Tradeweb Retail. Adams, who was CEO of that business, was retained as the head of the new unit.
"Tradeweb has doubled its transaction volume in retail over the last three months, and transactional growth is up fourfold from the first quarter," says Adams--retail platforms typically do not disclose exact volume numbers. He adds that the growth is a "reflection of key client wins, as well as generally strong growth in retail fixed income." Some Tradeweb Retail clients have said that they're gaining customers from the bulge bracket, according to Adams. "And we've seen some institutions reach into the retail market to tap a source of additional liquidity."
