But LiquidityHub shuts down
In the inter-dealer market, where global revenues reached $7 billion in 2007, e-trading is expected to account for 35% of revenues by 2010 (from 6% in 2000). Although the advantages associated with voice broking, especially at the larger end of the deal spectrum, will somewhat limit further expansion of e-trading among inter-dealer brokers, a functioning and well-supported electronic platform is now a vital part of an IDBs composition. "If you look at the current market environment, the value that e-trading brings in terms of depth, ease of access and speed of execution is obvious," says John Edwards, director of fixed-income sales at Icap. "Particularly since the credit crisis, it is very important to have access to these platforms."
And business is picking up for IDBs in new markets. The debt management offices of Belgium and the Netherlands have both opened the trading of their securities to other platforms. IDBs had previously been denied access to the European government bond market, which was confined to MTS, the first trading platform to have provided DMOs with a venue in which to concentrate liquidity and create price transparency. The decision taken by Belgium and the Netherlands marks a turning point. In Belgium, Icaps BrokerTec platform and BSGs E-speed were chosen after a voting procedure last December, while the Netherlands accepted the applications of the same platforms, as well as Eurex, in March. Edwards says that there has already been good progress. "There are four primary dealer banks currently supporting us in Belgium and four in the Netherlands that are contributing either all or part of their primary dealer obligations on the BrokerTec platform," he says.
Growth of Electronic Trading Share of electronic trading revenues to overall IDB industry revenues IDBs forecast to boom Estimated 2007 revenues and growth Source: Celent
Growth of Electronic Trading
Share of electronic trading revenues to overall IDB industry revenues
IDBs forecast to boom
Estimated 2007 revenues and growth
Other countries are at various stages of a consultation directed at the implementation of similar policies. "There is a trend towards opening competition on inter-dealer platforms where there are mandatory quotes," says Amaury DOrsay, head of government bond trading at Société Générale. DOrsay himself is working with French authorities on a multi-platform initiative, and public conclusions are expected any day now.
Such developments are welcome but they take place against a backdrop of difficult markets. The environment has gone from an abundance of liquidity to there being a premium. Although e-trading has experienced rapid growth in recent years, it is uncertain how far that growth will continue. "It will be a slow progression, as the main part of the increase in e-trading has already happened," says Garry Monaghan, head of euro and sterling government bond trading at BNP Paribas. "There was strong growth over the four or five years before 2007 but the curve is beginning to flatten."
If thats true, competition among IDBs is likely to rise sharply. The market is an established one, with the top three or four players, those that are now eligible to broker Belgian and Dutch securities, controlling around 70%, according to Celent. That BrokerTec already has four primary dealers signed up in the Netherlands shows how quickly it has achieved penetration; there are only about 13 primary dealers in that market. Each IDB will have to fight hard for its share of any growth, to the obvious benefit of its clients. "We believe in competition," says Nick Howard, co-head of European distribution at Barclays Capital. "Competition among platforms is very positive, and will result in improved service and more innovation."
That said, innovation in the government bond trading market has not always been welcomed by key market participants. The prospect of algoritmic-style trading in government bonds by third parties (namely hedge funds) on the euroMTS platform was highly controversial and was one factor that stimulated dealers interest in alternative venues. euroMTS has still not unveiled its intentions to the marketplace, despite saying it would do so by December 2007.