Rick McVey, CEO of multi-dealer credit trading and research system MarketAxess, predicts that the company will be profitable by the end of the year. He argues that the addition of Morgan Stanley and Merrill Lynch as dealers is a further vote of confidence in the platform’s technology and investor participation. Morgan Stanley is live in the US and is expected to be on the European system shortly. Merrill Lynch should be trading within a month. McVey says many banks on the platform see participation as a strategic equity investment as well as simply an opportunity to post bids and offers to a wider range of clients. “It’s a major part of our success story over the last year that we have managed to get the vast majority of the world’s leading dealers onto the platform,” he says.
Global trading volumes have risen steeply – August 2001 was the first month with more than $1 billion; in January the platform had its first $1 billion week, and managers say they expect the first $1 billion day soon. In Europe, the platform was hampered by the fact that it launched in September. It only did 60 trades in January but executives say they expect growth to be faster, if anything, than it has been in the US.
The platform is still adding products and upgrading its technology. It has moved beyond its core products – high-grade corporates, high yield, and emerging-markets bonds – into less liquid areas such as asset-backed securities, FRNs and certain agency and supranational debt. Eventually it plans to move into Asia, to complement its US and European operations. And it has just streamlined its European trading system to offer one-step trading.
European users can now go straight to the bond’s price rather than trading on a spread over a benchmark, although this information is still disclosed – this more closely mirrors traditional European practice. The platform is also due to expand its allocation and general straight-through processing capability.
Last February’s acquisition of Trading Edge, which owned rival trading system BondLink, gave MarketAxess an anonymous trading system to complement its own disclosed multi-dealer model. At present, McVey says, the disclosed system makes up the vast majority of its trading volumes, perhaps because it replicates traditional voice models more closely.
But he is confident that in the future, as investors become more comfortable, the anonymous model will gain ground. He says: “We think the disclosed model is the natural way to introduce electronic trading but we are confident that the anonymous model will take off given time. We are creating connectivity with the disclosed model, and have the patience and the backing to wait until the market is ready.” He points out that interest in the anonymous system, though small so far, is steady and growing.
Still further down the line, the market may be ready for a true electronic exchange for bonds. BondBook, the high-profile bond exchange, closed down last year but McVey thinks it may simply have been ahead of its time. “It requires a major change of habits at first to get investors to post bids and offers online anonymously,” he says. “But three or four years down the line, the model may take off.”
McVey is unwilling to go into speculations that MarketAxess could eventually merge with TradeWeb, the dominant government bond and high-grade trading platform. But he acknowledges the considerable overlap in ownership between the two, and that they seem to have the market sewn up.
With the demise of so many trading start-ups in 2001, most notoriously BondBook, BondClick and TruMarkets, the first wave of consolidation, seems to be over.
“It’s hard to see how further acquisitions could take the market forward,” says Alan Collins, president of MarketAxess in Europe. “We feel we have all the right things in place now,” says McVey. “Major dealers, a big investor base, and volume growth. We hope 2002 is going to be a very big year for us.”
