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Olesky: “The challenges are the |
TradeWeb, the biggest dealer-to-client trading platform for rates products in fixed income, is finding it difficult to break into corporate bonds.
Having started life as a platform for US treasuries, it has added a range of products including euro sovereigns, US commercial paper, mortgage bonds and others, all with healthy rates of success. However, bad market conditions are hampering efforts to launch corporate bond trading.
It is looking increasingly likely that MarketAxess will thrive as the corporate bond trading platform preferred by fund managers, as it continues to demonstrate new records in trading volumes.
The two networks are often considered to be rivals even though they trade entirely different products, with TradeWeb in government bonds and super-liquid credits and MarketAxess in corporate bonds. So when TradeWeb announced its plans to start beta testing corporate bond trading in July 2002 it was the first time that it looked set to compete directly for client flows.
At the time, TradeWeb told Euromoney that it expected corporate bond trading to come out of beta testing as soon as August. That means that the platform would stop the pilot phase with its eight shareholding dealers and open up trading to all of its dealers and clients. Several months later, beta testing continues. An e-finance executive from one of TradeWeb’s dealing banks says: “Has TradeWeb showed me that it can trade corporate bonds? Yes. Has it shown me how it can make any money out of that? No.”
Delays are common with this sort of development, and bad credit market conditions are certainly not helping. Lee Olesky, president of the TradeWeb group, says: “The challenges are the challenges of the market, not of e-trading. The structural issues do not go away. But over the medium term it will still be more efficient to trade corporate bonds electronically.”
Unfavourable conditions
But these unfavourable market conditions are not holding back MarketAxess. In November 2002 trading volumes on that platform hit $41.3 billion (counting one side of the trade only) – a 287% increase on the same month in 2001. A combination of slow but steady improvement in the bond market, with additions to the trading functionality on the MarketAxess platform, are helping to push it ahead.
These new trading features include a tool that enables fund managers to send electronically a range of price requests to dealers. The fund manager sets a deadline for banks to respond, so when the dealers send their prices back the fund manager can go through an electronic list and tick the prices he or she wishes to take. This is a closer reflection of how dealing already works with phones and faxes than the platform’s existing request-for-quote system, and it has prompted greater acceptance of the product from banks and fund managers.
Another feature that may have provided a boost to US volumes is the introduction of trading league tables. These can encourage banks to push volumes through the platform because they are keen to show potential issuing clients that they trade bonds well in the secondary market when in competition with other dealers.
For its part, TradeWeb is happy to sit back and wait until it is ready to launch corporate trading in earnest. It is in no rush to do this, as it is already working on trading a range of money-market products. In particular, after the success of its US CP platform, which now handles around 20% of trading volume in that product, it is set to launch ECP this year. Repo and certificates of deposit might follow.
TradeWeb’s back-office tools also form an important product. For example, its allocation tool, TradeXpress, saves fund managers time and effort by automatically splitting, say, a $100 million treasuries deal into 100 different accounts. It will soon release a tool to help settlement as well. This will tag all bonds on the platform with extra pieces of information so that as soon as a deal is executed the system can identify the fact that a security should settle into a particular account at a particular bank.
Once TradeWeb can do all of that for corporate bonds, it will feel that it is adding something valuable to the trading process. As Olesky says: “We will continue to move into the credit sector as we add ancillary services to that.” And he’s going to stick to the plan for the long term. “We had no expectations of massive trading volumes [in corporate bonds]. But markets have a way of changing, and we need to be positioned for that,” he says.
MarketAxess and TradeWeb will continue to exist side by side, not least because dealers are reluctant to see only one platform survive in any asset class, as that would give the platform too much control over pricing. But doubts about the future for MarketAxess are quickly diminishing.
