BlackRock Inc.’s internal electronic bond-trading system failed because it couldn’t attract a critical mass of customers, even as small dealers stood ready to aid trading.
Among the 30 clients out of 60 that had the option to use BlackRock’s Aladdin Trading Network, the mix of buyers and sellers wasn’t diverse enough, according to Brian Beades, a BlackRock spokesman. While the world’s largest asset manager had arranged for smaller dealers to take other sides of trades when needed, there wasn’t enough demand for that to occur, said an executive at one of the dealers who asked not to be named for fear of retribution.
Firms from BlackRock to Goldman Sachs Group Inc. have sought to build up electronic trading systems as Wall Street dealers that traditionally acted as middlemen by warehousing bonds cut the amount of debt they hold amid tighter rules on capital and risk-taking. BlackRock, which manages $3.9 trillion in assets, said April 23 it instead would route trades through MarketAxess Holdings Inc.’s electronic system.
“As the year progressed it became more apparent that effort was struggling,” Niamh Alexander, an analyst at KBW Inc. in New York, said in a note to clients yesterday. “This is a gracious way for BlackRock to provide an alternative solution to its clients and for MarketAxess to potentially pick up some new clients.”
The market for company debt, which generally trades over the counter, is growing less liquid as the biggest banks reduce the volume of their own money they use to facilitate credit trading. The 21 primary dealers that do business with the Federal Reserve have reduced corporate-bond holdings by 76 percent since the peak in 2007, according to Fed data compiled by Bloomberg.
MarketAxess said yesterday that it hosted 12.3 percent of U.S. investment-grade debt trading in the first quarter, up from 11.4 percent in the same period of 2012. The firm introduced a feature last year that Wall Street had resisted: the ability for investors to buy and sell bonds among themselves. More than 1,000 asset managers, insurance companies and other investment firms along with broker-dealers are active users of the MarketAxess platform, according to the company.
“Our goal has always been to enhance liquidity,” Beades said yesterday in a telephone interview. “With the understanding that our clients would ultimately benefit from an open trading model with even greater diversity of participants and order flow, it was more a question of when we would open it up more broadly and MarketAxess was the obvious choice for U.S. credit.”
The clients trading on the Aladdin system are mostly insurance companies, investment managers, sovereign-wealth funds and banks, Beades said. Those clients, unlike hedge funds, typically execute a buy-and-hold strategy for bonds, making the volume of buying and selling needed for a liquid trading system difficult.
Unlike trading in equities, where one security typically represents a company’s value, there are tens of thousands of bond issues in the market, all with varying coupons and tenors. That makes lining up a buyer and a seller for the same amount of a bond a challenge investors have yet to solve.
“Equity-like technologies and market structures do not address the issues of liquidity fragmentation and need for price discovery in order for corporate bonds to trade electronically,” Will Rhode and Henry Chien, analysts at consultancy Tabb Group, wrote in a report earlier this month. “Nevertheless, electronic trading is taking hold in the corporate-bond markets.”
Goldman Sachs spent a year developing an electronic trading system for corporate bonds called GSessions that started operating in 2012. Other electronic trading systems for fixed income include Tradeweb Markets LLC and Bloomberg LP, the parent company of Bloomberg News, which also provides news and information to the financial community.
About 30 percent of all daily credit-market activity in the U.S. comes from the firms in the Aladdin system, based on trading volumes reported by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, Beades said.