e-trading: New markets bolster IDBs


Jethro Wookey
Published on:

Can the rapid growth of e-trading in recent years continue?

But LiquidityHub shuts down

A mere nine months since launch, LiquidityHub, a multi-dealer platform, has ceased operations. Being less a trading platform than a sophisticated messaging system, LiquidityHub was a dealer-led response to shift interest rate derivatives from voice to electronic trading. It was backed by 16 banks, and was aspiring to move into government bonds after interest rate swaps. In a statement, LiquidityHub said that the decision came because of "recent market conditions, which have called into question the current scalability of the LiquidityHub model".

Despite the liquidity crunch, electronic trading of fixed-income securities has held up, relatively, in recent months say traders. Excluding March, which was highly volatile, volumes have been strong this year. This is the continuation of a long trend – e-trading has made huge strides in recent years. In the US, 57% of fixed-income trading is now electronic, according to a report from Celent, a research and advisory firm for financial institutions. That figure is the result of a compound annual growth rate of 17% since 2003, and is expected to reach 62% by 2010. The development of e-trading has advanced the most in the more liquid, standardized products, namely government bonds. Eighty percent of US treasuries are now traded electronically, and that’s predicted to reach 84% by 2010.

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 IDB’s 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."

Other 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, Icap’s BrokerTec platform and BSG’s 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


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 D’Orsay, head of government bond trading at Société Générale. D’Orsay 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 that’s 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.