Bond platform overload?

Another day, and another fixed income trading solution reveals itself, but is this space at risk of becoming dangerously overcrowded?

Today, three fixed income traders, formerly of Goldman Sachs, Barclays and Citadel, revealed they have joined TruMid Financial, which is currently seeking regulatory approval in the US to launch a bond trading service.

The news follows yesterday’s announcement by Bondcube, the brainchild of fixed income veteran Paul Reynolds, that is has received regulatory approval from the FCA, giving it the green light to launch in Europe (it’s still awaiting approval to operating in the US). The firm told that is has begun the testing phase for the platform that will anonymously connect buyers and sellers of bonds.

The above are just some of the examples of the flurry of innovation being seen in the fixed income space as liquidity has begun to be impacted by global regulatory changes. Basel III is the obvious culprit, as its heightened capital requirements for banks make it unattractive for them to hold significant inventory in bonds to trade on behalf of the buy-side, meaning institutional investors are seeing the liquidity options dry up.

This is not new to anyone of course, and as liquidity has become more difficult to find more and more firms have looked at ways to take the so-called “all-to-all” trading model seen in other markets and apply it to fixed income. With many now reaching maturity and seeking approval from regulators, the market is about to see an avalanche of new trading venues.

But this is a good thing right? Choice works well for the consumer doesn’t it? Well, it’s a double-edged sword, and it seems reasonable to expect a similar fallout to what was seen in the European equity market after MiFID was introduced in 2007.

The market certainly appears to be fragmenting, and before long there could be dozens of fixed income platforms all vying for investor attention. The problem then is that liquidity becomes fragmented in an asset class that already struggles to find sufficient liquidity for all but the most traded top tier bonds, many of which the banks are still happy to hold in their inventory.

Of course, these new platforms are banking on unlocking liquidity among the buy-side which may mitigate the effects of fragmentation, but with so many new ventures it seems inevitable there will be some negative impact in the short-term.

Further into the future, we might see (or perhaps are even likely to see) consolidation in this market as some players find they simply lack the liquidity to compete and the buy-side gravitates to a smaller number of platforms that prove viable.

Similarly, initiatives such as Project Neptune, created by Etrading Software, are looking at ways to help link up this disparate market and make it a little less overwhelming for investors to connect to the myriad platforms.

Whatever happens, it’s quite an exciting time for fixed income trading that could offer long-term benefits for investors, but the journey there is set to be difficult.