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Electronic trading: Members not so keen on letting hedge funds into EuroMTS

But move would boost liquidity when volumes are falling.

The supervisory board of MTS, the European bond trading platform is to receive recommendations from a committee, comprising mostly banks, on opening up the platform to third-party access during the middle of this month. Allowing hedge funds entry would dramatically change the number of players and might boost liquidity. However, few existing participants think the plan is a good idea.

Flat yield curves and becalmed bond markets have done EuroMTS few favours in terms of volumes in recent years. Although the platform remains the leading inter-dealer market for sovereign debt it has suffered from declining volumes. Activity fell 22% in 2005 on the previous year and 2006 was also disappointing – down 15% on 2005.

Hedge funds account for only 10% of investment in European sovereign debt, according to a poll of the top 20 EU bookrunners conducted by the BMA (now SIFMA) in September 2006. But the importance of hedge funds is magnified by the fact that they trade more frequently than other types of investors. Furthermore, they are the fastest-growing client category that trades electronically (see chart).

Sovereign debt market dealers suggest that it is mostly because of these declining volumes that the possibility of third-party access is being so actively considered by MTS.

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