Tradeweb’s Bank Owners Said to Consider New Bond-Trading SystemMatthew Leising
Tradeweb Markets LLC is negotiating with some of its bank owners to boost their collective stake by $100 million to lay the groundwork for a new U.S. credit-trading system, according to five people familiar with the matter.
The bank group includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., according to the people, who asked to not be identified because the talks are private. The amount of the stake increase hasn’t been finalized, the people said. Tradeweb is working with other firms and the size of the investment may grow, one of the people said.
New regulations and declining profits have spurred the banks that facilitate transactions to hold fewer debt securities, making it harder for money managers to find the bonds they want to buy or sell. Investors and banks have held a series of meetings during the past year to try to address the situation. The world’s biggest dealers cut their bond inventory by 76 percent from the peak in 2007 through March 2013.
“Dealers need to be willing to commit enough capital to make the markets liquid, and they haven’t been willing to do that since 2008,” said Kevin McPartland, head of market structure and research at Greenwich Associates in Stamford, Connecticut.
Representatives of New York-based Tradeweb, JPMorgan, Goldman Sachs and Citigroup declined to comment.
Tradeweb, a bond- and derivatives-trading network, is majority-owned by Thomson Reuters Corp., with the rest split among Goldman Sachs, JPMorgan, Morgan Stanley, Citigroup, Bank of America Inc., Credit Suisse Group AG, Deutsche Bank AG, UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc.
It doesn’t currently offer trading in U.S. corporate bonds, according to the asset types listed on its website.
Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb and Thomson Reuters in facilitating bond and swap trades between investors and banks, and in providing financial data and news to investors.
BlackRock Inc., the world’s largest asset manager, created an internal electronic bond-trading system in 2012. After failing to attract enough customers, it decided to route trades through MarketAxess Holdings Inc.’s computerized system instead.
As part of that agreement, BlackRock and MarketAxess developed a pricing system that upset some dealers who trade with their customers on MarketAxess, said three of the people familiar with the matter. That explains part of the rationale for the dealers to create a competitor via Tradeweb, the people said.
The change is an alert that notifies any investor on the MarketAxess or BlackRock system if an incoming order matches a bond they want to buy or sell, according to a person familiar with how it works. That could allow two asset managers to trade directly with one another, preventing dealers from participating in and profiting from the transaction.
MarketAxess continues “to believe that the credit markets need new trading solutions, and we are working closely with our dealer and investor clients to develop innovative technology that helps increase market liquidity and reduce fragmentation,” according to a statement from the company.
Bloomberg LP also competes with MarketAxess in facilitating bond and swap trades between banks and their customers.
Lauren Post, a BlackRock spokeswoman, declined to comment.
Stricter capital requirements from the Basel Committee on Banking Supervision have made holding bonds more expensive for dealers, prompting them to hold less bond inventory, thus making them less able to facilitate transactions. They have also curtailed their trading activity out of concern that the Dodd-Frank Act adds regulatory risk due to how holding bonds is treated under the proposed Volcker Rule.
Trading bonds has also become less profitable. Citigroup said last month that its fixed-income trading revenue excluding an accounting adjustment dropped to $2.78 billion, a decline of 26 percent from a year earlier. Also last month, JPMorgan, the biggest U.S. bank, reported an 8 percent decline in bond-trading revenue, to $3.44 billion.
BlueMountain Capital Management LLC, Pacific Investment Management Co. and Fidelity Investments are among money managers that are in discussions to form a consortium that would seek ways to make it easier to buy and sell corporate bonds in the U.S.
The firms, along with AllianceBernstein Holding LP and Wellington Management Co., have been reviewing ways to invigorate the market, six people involved in the talks said last month. The goal is to propose a set of market structure changes to the dealer banks they rely on for trading, the people said.
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