February 14, 2013 7:27 pm

Deutsche spearheads bond trading platform

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Deutsche Bank is spearheading a move among institutional investors and rival brokers to create a platform that will ease trading in corporate bonds.

The initiative is a push by the broker-dealer to overcome fears of growing fragmentation in the industry as technological advances and global regulation reshape trading.

Regulators for the G20 want to deleverage the banking sector and raise its capital levels.

They also want more assets traded via trading venues that have transparent pricing with deals backed by more collateral.

Deutsche has floated the idea that bonds not matched by a broker are put into a so-called liquidity hub and institutions and rival brokers can post firm interest.

Neither the identity of bidder nor the price is disclosed and deals would be reported on completion.

It would also mean the broker could adopt a more agency-like approach to trading of some corporate bonds.

Corporate bond trading has historically been far less liquid than stock trading because of the sheer variety of outstanding bonds.

Banks have historically played a central market-maker role as they were able to hold large inventories.

After the financial crisis, the banks’ desire to maintain such inventory has weakened in the face of the regulatory changes, notably the higher levels of capital they will have to hold.

A survey for the Association for Financial Markets in Europe this week found that liquidity for high yield and investment grade credit, which covered corporate bonds, had declined 50-60 per cent last year.

Dominic Holland, director of credit e-commerce sales at Deutsche Bank, said many banks were responding to the problem by developing their own platforms. “It isn’t solving the liquidity issue,” he said.

A recent glut of new issuances by corporates had provided a plaster over the cracks, he added.

“If we don’t work together over this, the market is going to go through significant stress,” he said. “We’re confident this idea is a ‘flyer’ and will work.”

Regulators and authorities have pushed the industry to reform the market in the past.

The Cassiopeia Committee, a Paris-based international group of investors, issuers and market makers, has in the past called for a trading platform that works more like a stock exchange, where users can see the order “book” and gauge the depth of interest in a particular bond.

Aiming to break into the bank-dominated market, bourses such as NYSE Euronext and the London Stock Exchange launched their own platforms. However, their success has been muted.

www.ft.com/tradingroom

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