Bondcube Enters Race to Forge a Fixed-Income Market That Works

Electronic bond trading is becoming increasingly popular with entrepreneurs and technology firms, who have set up more than a dozen new markets to trade company debt. The question is whether any of them will succeed.

Bondcube, a London-based startup 30 percent owned by Deutsche Boerse AG, has gone live in the U.S. and Europe, according to a statement on Tuesday. The fixed-income market hosts securities denominated in 10 currencies, and averages about $300 million of orders a day.

“To simply start in this space as a new platform, never mind survive, you need a good idea, you need institutional financial support -- in our case that is Deutsche Boerse,” said Paul Reynolds, Bondcube’s chief executive officer. “You need to be properly regulated. Unless you achieve those milestones, you’re not even going to start.”

Technology companies are stepping into a gap in the market created by requirements on banks to hold more capital. Rule changes have restricted the banks’ ability to trade on their own account and have also made it more expensive -- and therefore less profitable -- for the firms to hold bonds in the expectation that clients will want to buy them.

Bondcube is regulated by the U.K.’s Financial Conduct Authority, allowing traders in another 30 European countries to use the electronic bond-matching venue. The company has also become a member of the Financial Industry Regulatory Authority in the U.S. Ten firms already use Bondcube, matching as many as five trades a day. A further 10 firms will join the platform each month.

The startup will compete for orders with almost 20 other electronic trading platforms, according to research firm Greenwich Associates. Bloomberg LP, the parent of this news organization, operates one of them.

Consummating Trade

Bondcube provides investors such as pension funds with an alternative way to find and then negotiate trades. Once a buyer and a seller have agreed to trade, UBS Group AG will consummate the transaction by accepting the deal. Two more banks may join UBS in this role, said Reynolds, who previously traded corporate debt at Citigroup Inc., Deutsche Bank AG and UBS.

Other notable UBS alumni working in corporate-bond markets include Stu Taylor, the CEO of Algomi Ltd., a bond sales-management platform, and Deutsche Boerse’s incoming CEO, Carsten Kengeter. The former head of UBS’s investment bank joined the exchange operator at the beginning of this month.

UBS has tried to get involved with the increasingly electronic corporate bond market since at least 2012, when it started its Price Improvement Network, or PIN.

“We decided to move beyond the traditional dealer-to-client model,” said Mark Russell, head of FRC bond-execution services at UBS, in a statement last month. “It has been clear to UBS that fixed-income markets would go through a structural evolution and that new forms of execution would need to emerge.”

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