Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.


11:11 PM
Ivy Schmerken
Ivy Schmerken
Connect Directly

Deja Vu for Bond Exchanges

With Archipelago announcing in October that it's going to trade listed corporate bonds on its electronic trading system, electronic bond trading systems providers might be a little nervous.

From the Jan-Feb 2006 issue of Advanced Trading

With Archipelago announcing in October that it's going to trade listed corporate bonds on its electronic trading system, electronic bond trading systems providers might be a little nervous. After all, Archipelago is merging with the New York Stock Exchange, and the Big Board already has an automated bond system (ABS) that CEO Jerry Putnam says needs an upgrade. If any market has the clout, technology, connectivity and customer base to revamp the bond trading system, Arca/NYSE is it. But, in the fragmented world of bond trading - where each sector (e.g., Treasuries, corporate bonds, high yield, mortgage back securities, European government bonds, etc.) has access to its own sources of dealer liquidity - it's going to be difficult for an exchange model to win critical mass without some incentives.

So, are the leading fixed-income trading systems worried that the Big Board will encroach on their turf? Not at all. Speaking at a bond conference in December on a panel with Archipelago President Mike Cormack, CEOs of the two major electronic bond trading systems - TradeWeb and MarketAxess - reminded the industry that previous attempts to experiment with an exchange model in fixed income - namely BondBook and Trading Edge - failed.

While the mood on the panel mostly was cordial, the message was clear: TradeWeb and MarketAxess are not feeling threatened by the NYSE's and Archipelago's plans to expand into corporate bonds. "There have been many attempts to push the fixed-income markets into an exchange world - it hasn't worked," said Richard McVey, CEO of MarketAxess. "This is not a market that has continuous liquidity," he added, noting that only about 500 bonds are actively traded. Further, McVey pointed out that Archipelago's new partner, the NYSE, has had ABS as a model since 1976, but it still represents less than 1 percent of the volume in corporate bonds today.

Despite these warnings, Archipelago officials are giving the bond exchange model another whirl. Archipelago's Cormack joked that he hadn't felt this way since he sat on a panel with market makers in over-the-counter stocks during the early days of Archipelago's emergence as an ECN in equity trading. Of course, the rest is history. Archipelago, Instinet and Island captured half of the market share in stock trading from Nasdaq, which has spent the past five years trying to win it back. So perhaps the bond systems should sell Archipelago short?

"There is healthy skepticism as to whether an exchange can work in the bond market," said Jim Toffey, CEO of Thomson TradeWeb, at the conference. "BondBook had all the healthy ingredients to make that happen." Whereas the current electronic bond trading systems have had success with a request-for-quote model - in which the buy side requests bids and offers from several dealers and the dealers know the identities of buy-side customers - in an exchange model, trading is anonymous and both the buy and sell sides need to act as liquidity providers. The problem with BondBook, Toffey explained, is that "The buy side traditionally liked to be liquidity takers and not providers, and that's a fundamental hurdle in a marketplace where it takes both to get legs."

However, Archipelago's agenda for the listed corporate bond space differs from BondBook's approach, which was to offer anonymity to the buy side and increase price transparency. Arca/NYSE's motive seems to revolve around earning listing fees from corporations and diversifying the range of asset classes. "We have a few clients who are significant players in the equity and fixed-income space," Archipelago's Cormack told conference attendees. "It is a technology pricing solution for at least these clients." But, while Cormack is betting that technology becomes an enabler and will lower the barriers to entry, the CEOs of TradeWeb and MarketAxess remain unfazed. That's because they're focused on competing with each other.

Ivy Schmerken is a 20-year WS&T veteran. As Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. [email protected]

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.