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November 24, 2013 6:54 pm
Some of the largest banks have tentatively agreed to create a new electronic bond trading venue in an attempt to improve liquidity in the $9tn market for US corporate debt while still retaining their control over the way the securities change hands.
Five major banks have said they will stump up tens of millions of dollars to fund the new venue on Tradeweb, a company owned by Thomson Reuters and a consortium of banks, according to people familiar with the project.
The new venue seeks to resolve the pressing problem of poor liquidity which hampers the ability of bond investors to buy and sell large amounts of debt. New regulations and tougher risk management standards have led so-called dealer banks, which traditionally carried large inventories of bonds to facilitate trades by their clients, to cut inventories. That has made it more difficult to trade bonds.
While a new platform that includes many of those dealer-banks could be viewed as good news for bond investors, some are interpreting the move as a way for big banks to maintain their dominance over the lucrative business of arranging bond trades.
According to people familiar with the plans, a major sticking point is that the banks will not pool together their prices on the Tradeweb venue, despite pressure from investors for the banks to do so. Having segregated prices means bond investors will only be able to transact with banks on a bilateral basis and not with a number of different counterparties at the same time.
“It’s great news that dealers are getting together and looking to take control of the liquidity issue, but the market wants the ability to sweep the stack [of prices],” said one bond manager. “The banks will invest millions of dollars but there will continue to be a disconnect.”
At least five banks that are minority owners of Tradeweb are believed to have signed up, with another two yet to confirm they will join. Each is being asked to invest a substantial amount of money in the the venture, with the high asking price of between $10m to $20m seen locking out smaller rivals.
Tradeweb declined to comment.
The project is said to be spearheaded by Cactus Raazi, the former Goldman Sachs bond salesman who Tradeweb hired from Nomura earlier this year. While at Goldman, Mr Raazi was known for selling subprime bonds that helped reduce the bank’s mortgage exposure before the financial crisis.
To date, the electronic trading of corporate bonds remains piecemeal and concentrated in the execution of smaller transactions. MarketAxess is the dominant US platform, but its high cost of trading has long chafed with the big dealers. Earlier this year, MarketAxess teamed with BlackRock, the world’s largest asset manager, in a partnership viewed as threatening dealers’ dominance.
The move to set up the Tradeweb platform is seen as an effort to undercut MarketAxess, said bond managers and bankers.
“This could be the thing to start the war [over electronic bond trading platforms],” noted one market structure specialist. “There’s a question over whether this deal reinvents the market or stagnates the market. If the only way a price gets made is if a dealer does it, then it’s not in any way addressing what is a serious issue.”
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