Trading places - how to choose
Electronic trading of fixed-income securities continues to grow as the market starts to consolidate around a number of leading platforms. But while the market has rationalised to some degree, there is still a large number of platforms offering a variety of products and different types of trading. In an attempt to win market share, the platforms have been enhancing their services, while the industry is continuing development of interface standards that are making it easier to link to the platforms and to process trades.
The Bond Market Association (BMA), a Washington-based group that represents international bond market participants, has been tracking the evolution of electronic fixed income trading for several years. According to its latest report, eCommerce in the Fixed-Income Markets (November 2003), there are now 77 fixed income trading platforms operating (down from 81 in 2002, and well over 100 the year before that), of which 46 are based principally in the US and 31 in Europe, with a trend towards platforms supporting trading in both the US and Europe. Although the BMA attempts to quantify the volumes of electronic fixed income trading, not all platforms have been willing to provide information so no overall figures are available. However, of those that did provide figures, average growth in 2003 was 70%, says the BMA.
There are five main types of fixed income trading platform. Auction systems, such as TradeWeb, conduct auctions of securities, with some focusing on new issues and others on the primary market, and some identifying participants and others running anonymous trading. Cross-matching systems, such as MarketAxcess, run anonymous real-time or periodic cross-matching sessions where dealers and institutional investors can execute complex portfolio strategies. Inter-dealer systems, such as Euro-MTS, focus on the inter-dealer market. Multi-dealer systems, such as SWX Eurobonds, will display all or the best bid and offer prices from participating dealers, and generally allow investors to request quotes from one or more dealers. Single-dealer systems, such as Goldman Sachs, enable investors to execute transactions with a dealer of choice, usually with a choice of access through third-party providers, proprietary networks or the internet.
Given this myriad of platforms, how should a pension fund or investment manager go about choosing which to use? A good starting point is to look for all the platforms that deal in the products that the organisation is interested in. The BMA’s report, which is accessible on its website (www.bondmarkets.com), lists all the available systems with the products they support, whether they support trading in Europe or the US or both, as well as the system type and how they can be accessed. It also gives a description of each platform, with contact details for the organisation operating it.
An alternative approach for organisations that have a Bloomberg terminal is to look at the fixed income trading that this system offers, suggests Joe Sack, executive vice president at the BMA. While Bloomberg does not offer all the facilities that platforms such as TadeWeb and MarketAxcess do, nevertheless it offers executable deals that might fulfil the organisation’s needs, or could give a taster of what electronic trading is about.
Connecting to the platforms is now a lot easier than it was when they first emerged. Interface standards for connecting investors’ systems to those of brokers and trading platforms have evolved. The BMA supports the development of the FIX protocol, an industry standards initiative now managed by x-based FIX Protocol, and version 4.4 of the standard, released last year, supports trading of a wide range of US and European securities, including European corporates, agencies and sovereigns.
In terms of linking to the platforms, the options differ between systems. MarketAxcess is accessible via the internet, TradeWeb via the internet or Moneyline Telerate, while SWX Eurobonds is accessible via the internet, Bloomberg, Reuters or its own proprietary network.
But connecting to the platforms to trade is only part of the story. In their efforts to win business the platforms have been extending their facilities and many now offer the ability to clear and settle trades on the platform too. “This could be an advantage to a pension fund just putting its toe into the water [of electronic fixed income_trading] for the first time,” says Sack.
Over the past year, a few platforms have started to gain significant traction in the market, in particular MarketAxcess and TadeWeb.