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September 2002

Online credit trading finds its leaders


MarketAxess has risen to the top of online credit trading through a mix of luck and skill. Now TradeWeb has launched corporate bond trading too. The downturn has helped position them as the two biggest platforms. But they’re competing for a tiny share of overall corporate bond business.




       
Rick McVey
Amid credit market gloom and forecasts that continually postpone the onset of recovery, the CEO of online credit trading platform MarketAxess is optimistic. "More people are starting to feel like the vast majority of bad news is behind us," says Rick McVey (pictured above). "I am encouraged by the signs. We are on the verge of a major growth wave in corporate bonds."
Before you wonder what McVey knows that investors around the world don't, bear in mind that, as the head of the last remaining serious corporate bond platform, McVey is paid to be positive. "In many respects, I feel like we have been an oasis in a credit desert over the last two or three quarters," he says.
This time last year, MarketAxess was just one of a large number of credit trading platforms. Banks were beyond the stage where they would throw support (and money) behind any idea with a decent URL and a plan to be big in bonds, but competition was still intense. Twelve months ago there were roughly 100 bond-trading platforms. Now there are just over 20.
The main source of competition to MarketAxess came from BondBook, which had a good list of backers but failed when its anonymous trading model didn't attract investors or please the banks. Eventually, Morgan Stanley led other shareholders by abruptly pulling out in September 2001. The platform folded. Sympathetic observers still say it was ahead of its time.
Since then, MarketAxess has had an easier run to the top. Whereas banks, including participating dealers, used to snipe about its trading volumes and speculate that it would soon fold, they now accept that it is the best (and admittedly only) big corporate bonds site. Any new platforms would find serious difficulty in attracting backing today.
The platform enables trading on a request-for-quote basis in over 100,000 bonds, and offers research and new issues. It boasts that it has signed up 13 of the 15 biggest corporate bond houses as dealers, shrugging off the fact that the two that still haven't joined are Salomon Smith Barney and Goldman Sachs.
       

View graph.
Merrill Lynch and Morgan Stanley joined four and six months ago respectively, a development that marked a further stage in the platform's maturity. MarketAxess's European arm, which only started trading in January, is making slow but steady progress. The company recently chose Europe rather than the US to launch a portfolio trading product.
MarketAxess has sidelined some of its more ambitious ideas. Its anonymous trading facility, which it acquired when it bought Trading Edge in March 2001, was at one stage going to be its primary means of trading, but the demise of BondBook confirmed that anonymous trading was not supported by banks or investors. The similar difficulty that CoredealMTS is facing is further proof of this.
McVey says: "The market is telling us that it favours the disclosed enquiry model in the short term - banks are much more comfortable responding to enquiries."
The platform is not yet at break-even stage but it does claim that it will be handling $700 million to $800 million in daily volume by the end of the year, and it has cut costs by 75% over the past year.
Damon Kovelsky, an analyst at Meridien research, says: "The MarketAxess model makes sense. It is developing step by step. If you go back 18 months or two years, anyone who said they were going step by step was considered a failure - it brought negative publicity. But the incremental approach is definitely the way to go."
MarketAxess is not about to dominate corporate bond trading though. Overall electronic trading in corporate bonds makes up only around 1% to 2% of the total, according to research house Celent. And corporate bonds are by their nature less liquid than treasuries anyway. Around $300 billion of US government bonds are traded daily. For US corporates it's nearer $15 billion. So TradeWeb, which is predominantly a treasuries platform, is naturally going to enjoy higher volumes than MarketAxess, and they are both still dealing with a small pocket of bond trading as a whole. Kovelsky says: "If some alien force closed the doors of all these platforms, the effect would still be marginal. They are growing, but not by leaps and bounds."
There's still growth potential, though. Sang Lee, an analyst at Celent, says: "If you compare electronic corporate bond trading at the end of 2000 with what is going on now in daily trading volumes, there is 100% growth." MarketAxess itself has seen 350% growth in volumes over the past six quarters. Even hardened cynics, who point out that the platform is measuring that growth from a very low base, have to admit that it is healthy.
The entry of TradeWeb into corporate bond trading is at once a fresh source of competition to MarketAxess and a reassuring sign that online credit trading is possible and credible. TradeWeb's corporates platform is still in beta testing with key banks and investors but is set for a general launch in September or October.
At present the platform features 48 corporate bonds, which are selected by dealers for their high credit rating and liquidity. Demand for trading has been at best slight, because of the general unwillingness of bond investors to take on new risk, but when trading does take place it mimics the TradeWeb structure for treasuries, which itself mimics the phone. Investors pick indicative prices off the screen and send a request for a firm price to a group of dealers, who can choose whether or not they want to do the deal and at what price.
TradeWeb claims to have a unique model for corporates whereby trading is one-step. Quotes coming back from dealers include the spread to treasuries, so investors can see the price banks are putting on the underlying benchmark. That means they do not need to go back to the banks and confirm the treasury spot price. Investors using MarketAxess can also complete the treasury leg of a trade on that platform.
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