Electronifie combines lit and dark corporate bond trading

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New trading system raises funds, prepares launch; 22 of top 50 asset managers signed up.

by Peter Lee

Nicole Olson-600
Nicole Olson, chief strategy officer,  Electronifie

Electronifie is the latest new trading platform striving to improve the illiquidity now bedeviling the corporate bond market.

Headed by Amar Kuchinad, a former policy adviser at the division of trading and markets at the Securities and Exchange Commission – and before that head of a number of equity option, emerging market, and credit trading businesses at Goldman Sachs and Credit Suisse – Electronifie is set to launch in the next few weeks.

Electronifie has been attracting notice among credit market participants on both sides of the Atlantic, but will focus to begin with on the 1,500 or so most frequently traded US corporate bonds.

An unusual feature of this all-to-all trading platform is that it combines a ladder of transaction methods, including a lit limit order book for price discovery in smaller trades, a darker midpoint order book for matching large blocks and finally a midpoint matching session – a form of crossing session – open to all platform participants.

Evolution

In March, as the friends and family backers of Electronifie closed an initial $5 million series A institutional funding round that brings total funds raised to $12 million, Euromoney caught up with Nicole Olson, chief strategy officer.

Olson says: "Our premise is that the corporate bond market structure has already evolved significantly in response to a reduction in dealers’ ability to provide balance sheet. The platforms that succeed will be those that organize around this new market structure.

"Our platform includes the existing market participants – asset managers, hedge funds, broker-dealers – but organizes them in a new way."

Electronifie studied institutional size trades of $1 million or bigger in the US corporate bond market for the first nine months of 2014 up to September 10, using data from Financial Industry Regulatory Authority’s trade reporting and compliance engine. It found that of the 29,000 US corporate bonds with distinct Cusip identifiers, just 1,500 accounted for 53% of all secondary market volume.

It is on this subset that Electronifie has decided to concentrate, asking designated market makers to make firm prices on its lit exchange in minimum size of $200,000 and maximum spreads.

More intriguingly, and contrary to the received wisdom that the buy-side typically all faces one way, Electronifie found that for 52% of the volume it surveyed – comprising more than 690,000 trades, worth $2.6 trillion – bonds passed on the same trading day from an investor wanting to sell to an investor wanting to buy.

We encourage investors to put in the full size of their orders. We do this in a number of ways…
Nicole Olson

Even though much of this trade was intermediated by bank dealers, Electronifie concludes that volume is potentially crossable between investors.

Olson says Electronifie will launch in phases, layering in clients over the next few weeks. The platform is now working with roughly 50 clients, including 22 out of the top 50 buy-side firms ranked by assets under management. Three broker-dealers are signed up to make markets, including one bulge-bracket firm, and these are already streaming live prices.

"Designated market makers will receive a revenue share for streaming levels in bonds to our lit limit order book – where prices are displayed to all participants and are immediately executable," says Olson. "These levels help to establish a midpoint price at which larger blocks can then be matched.

"In the hidden midpoint order book, investors can enter anonymous indications to trade in a certain bond in large size at the midpoint price established by the limit order book. All participants can see the opportunity to trade in that bond, but all information is kept confidential, including identity, size and side. If there’s a match, the trade is executed at a small mark-up/mark-down from the mid."

The priority for the hidden midpoint order book is to allow the bare minimum of disclosure to bring two parties together. At the same time, Electronifie wants to enable transactions in large size.

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Olson says: "We encourage investors to put in the full size of their orders. We do this in a number of ways, including limiting information leakage at every stage. In addition, investors get priority in our midpoint matching sessions for the order size they enter initially. The midpoint matching session is launched after there’s a large midpoint trade.

"In the platform-wide midpoint matching session, all participants are notified and they then have 10 minutes to enter any orders in that bond at that same midpoint price. All orders are crossed at the end of the 10-minute matching session. The premise is that customer liquidity begets liquidity."

Aside from the 1,500 most actively traded corporate bonds in which designated market makers stream executable prices, Electronifie allows any participants to make markets in its limit order book for another 3,000 bonds.

Further ahead, it would make sense to operate across the global credit market and maybe even other asset classes.

However, first it needs to launch successfully – and the marketplace it is launching into already looks crowded.

In March, capital markets consulting firm GreySpark Partners published a report examining the electronic solutions being proposed to reboot the corporate bond market and identified 23 electronic trading platforms launched since 2010 with another eight in development for launch this year.

"It looks like we may be at or close to the peak of these launches and that both the buy-side and even the sell-side, unable to link to all of them, will now want to drive liquidity to a smaller number of venues that do the best job of facilitating trade," Russell Dinnage, senior consultant in the capital markets intelligence practice at GreySpark tells Euromoney.

"And it might be that when that happens, the flow of liquidity in the corporate bonds market will actually improve."