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Saturday, 18 November 2017

Financial Exchanges 2005 - Transparency and efficiency

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In less than five years, Market Axess has built a thriving franchise in the highly competitive business-to-customer electronic bond trading platform sector. Its head of Europe, Iain Baillie, talks about the advantages of electronic trading and the potential for future growth.

Market Axess has a presence in a wide array of markets in the business-to-customer sector, and faces varied competition. It is in the same territory as Bloomberg, which has a request-for-quote business; in the SAS (sovereigns, agencies and supranationals)/covered bond sector TradeWeb is a prominent competitor, while in trading government bonds Market Axess is up against Bond Vision, which is run by MTS.

“Increasingly we would call it [Market Axess] a credit market platform as opposed to a corporate platform,” said Iain Baillie, head of Europe.

The firm, which recently completed its IPO, started operating in the US high-grade business sector in 2001, and the following year opened up in Europe. For the moment, the US business is still dominant, but the firm is aiming for its revenues in Europe to grow in relative terms. “In 2003, Europe was about 15% of our overall volumes and in 2004 it was over 25% of overall volumes. We wouldn’t describe ourselves as US-centric . . . in terms of our business push it’s very much both Europe and the US that are equally important,” said Baillie.

On its European platform the firm has five products. There is fixed-rate euro-denominated, fixed-rate dollar-denominated and fixed-rate sterling, and within those sectors all the different segments of the corporate market and financials.

“Then we have a floating-rate note product, which is actually cross-currency; and an SAS and covered bond segment that is also cross-currency. So we really cover most dimensions of the credit business,” said Baillie, who added that in the US there is also a high-yield platform.

Measuring market share in this fast growing sector is difficult, but Baillie argues that Market Axess is a major player.

“In the US, because of Trace [the NASD’s reporting and compliance system], we can have a pretty good stab at our market share and it varies between 10% and 15% of what we think is the customer to dealer business, and at times is as high as 20%.”

“Our market share varies very much within the size buckets of transactions. There is a sweet spot for electronic execution, which is between nought and US$10m. On the whole, large trades go to customers, and the dealers would be happier having those done on the telephone and maintaining that extra control.

“Within the European market there is no Trace system, so there is no means of judging the overall size of the secondary credit business. But most people’s guess is that the business that took place in 2004 was a reasonably significant decline from the amount in 2003. New issuance was down, there was an absence of volatility in the market, but our volumes continued to grow and we continued to sign up an ever-growing percentage of the major institutions onto the platform.”

Execution efficiency

A major selling point for the electronic trading of credit is the speed of execution. “Most of our trades now are executed within 45 seconds or a minute, so if you can imagine how long it would take to get four or five prices in competition by traditional means, it’s a huge efficiency saving,” said Baillie.

But post-trade benefits are also important. “the government space [the driver for electronic trading] moved onto the post-trade environment quite quickly, and in credit we’re now seeing that process. We’re increasingly building links, direct links into customers and into their order management systems.”

A further advantage, and one that appeals to regulators, is the transparency that electronic trading can offer. “There’s a very significant best-execution aspect to electronic trading . . . that is increasingly important as far as the regulators are concerned,” said Baillie. “I think it’s inevitable that there will be some sort of regulatory-driven trade reporting. Its been accepted that it’s been successful in the US in terms of increasing transparency, which ultimately is good for volumes . . . I don’t think there’s been lessening of the dealers’’ risk appetite because of the publishing of trades. So my guess would be that it will happen here [in Europe].”

Looking ahead, there has been a lot of development in the electronic trading of index products, and there are rumours that Market Axess is going to launch a credit derivatives platform for non-index products.

“The growth in index trading has been phenomenal. We are very optimistic that we will have a product that will cover index trading by the end of this year, and will cover single names in the early part of next year. The fascinating bit with the whole CDS [credit default swap] business is that post-trade efficiency is going to drive that process as much as trading efficiency.”

Overall, Baillie is confident that things are moving in favour of Market Axess and electronic bond trading. “The point I would emphasise is that, clearly, the efficiencies of electronic trading are going to drive a growing percentage of overall volumes to be done electronically over the course of the next two or three years.”

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