A new wave of fixed income trading platforms are set to launch in the coming months and, while they are each taking a different approach, all are targeting the buy-side as the key to unlocking liquidity.
Earlier this month, ITG announced it plans to launch a bond dark pool providing continuous and negotiated trades centered around its own version of the national best bid and offer for fixed income.
The move puts ITG among several new entrants to the space, each of which are hoping to tempt the buy-side to begin trading their bonds with each other, instead of the increasingly strained banks that have dominated the space.
Another new entrant is Bondcube, set up by former Deutsche Bank and Citi fixed income trader, Paul Reynolds, the service hopes to connect buyers and sellers anonymously using indications of interest (IOIs), facilitate negotiations and foster a community of institutional traders.
“Today, banks are refusing around 80% of their fixed income order flow, because the risk and cost of trading them has simply become too great. So we have a problem where there is massive demand to trade fixed income, but little capacity to actually make those trades happen,” he told theTRADEnews.com
Bondcube is currently awaiting authorisation from the UK’s Financial Conduct Authority, which will enable it to begin trading in Europe, and is targeting November this year to launch. Around 20 buy-side firms have submitted their paperwork so far, with a further 70 expressing their interest in the platform.
Reynolds hopes this will continue to grow as launch approaches and beyond.
Bondcube is also looking to become regulated as an alternative trading system in the US.
“The more institutional investors we have on board, the more liquidity our users will be able to access and the lower their trading costs will get, so we’re focused on getting that critical mass,” he adds.
Institutional block crossing network Liquidnet is also set to launch its bond trading service, acquired when it bought Vega-Chi earlier this year, into Europe.
Mark Pumfrey, CEO of Liquidnet Europe, said: “Our members have been asking us to offer Fixed Income trading over the past few years as liquidity has dried up.”
“Our strengths in equities are why we will be successful in fixed income. We have strong relationships with our members, we have their trust to sweep their blotters and we have a strong track record in policing and managing behaviour. Our members hold over 75% of the US and European bond assets. With the rollout of our fixed income liquidity sharing model we’ll be able to provide the same quality of block liquidity anonymously and with minimal market impact to the buy-side that we deliver in equities.”
The approaches of ITG, Bondcube and Liquidnet are all seeking to apply practices that have worked well in the equity space to the fixed income market in order to take the place of banks that have been forced out due to regulation.
But the increased cost of capital stemming from Basel III has been on the cards since shortly after the financial crisis, so why has it taken this long for the innovation to seep through into actual products.
Reynolds said it has taken two years to get Bondcube up and running due to the length processes of getting funding, developing and technology and, crucially, attaining regulatory approval, all of which followed a realisation that fixed income was changing more than many might have initially forseen.
“When I was working as a bond trader in a bank, it was just becoming impossible to make any money, and when I met someone with the technological expertise to link the buy-side inventories together, it seemed the obvious next step in this asset class,” he added.