Tradeweb Said to Start Trading Corporate Bonds Next Month

Tradeweb Markets LLC will start a new U.S. system for trading investment-grade corporate bonds next month, a person with direct knowledge of the matter said.

The bond- and derivatives-trading network is seeking to offer investors a way to buy and sell corporate debt at a time when asset managers are struggling to transact in the $9.8 trillion U.S. market. Another concern for the broader market is how to avoid bottlenecks when investors want to sell debt as interest rates rise, said Constantinos Antoniades, chief executive officer of Vega-Chi Ltd, a fixed-income trading system.

“You’ll find yourself in a situation where the market structure is not fit for purpose,” he said today at a fixed-income discussion at Liquidnet Holdings Inc. headquarters in New York. The problem is exemplified by the fact that asset managers hold 99 percent of bonds outstanding and can’t trade among themselves, he said.

Tradeweb plans to offer electronic trading between banks and their customers in bonds worth more than $1 million, what’s known as round lots in the industry, according to the person familiar with the matter, who asked to not be identified because of a lack of authorization to speak publicly. The company will offer live prices prior to trading and aims to execute 95 percent of orders placed, the person said.

Slow Embrace

Investors have been slow to embrace electronic trading for bonds worth more than $1 million out of concern that the bid or offer becoming public will sway the value of the underlying security before the trade is done.

Gauri Mundkur, a spokeswoman for New York-based Tradeweb, declined to comment. While Tradeweb offers trading in U.S. Treasuries and various government bonds, it currently doesn’t list U.S. corporate debt, according to the asset types on its website.

MarketAxess Holdings Inc. controls 80 percent of electronic trading in U.S. investment-grade debt, according to Kevin McPartland, head of market structure and research at Greenwich Associates in Stamford, Connecticut. While three out of four asset managers trade investment-grade bonds electronically, that still equals only 15 percent of their total trading volume, McPartland said.

Tradeweb is “looking to diversify their business lines,” McPartland said.

In November, Bloomberg News reported that Tradeweb was negotiating with some of its bank owners to boost their collective stake in the company, laying the groundwork for a new U.S. credit-trading system.

Regulatory Squeeze

New regulations and declining profits have spurred banks to hold fewer debt securities, making it harder for money managers to find the bonds they want to buy or sell. The world’s biggest dealers cut their bond inventories by 76 percent from the peak in 2007 through March 2013.

Stricter capital requirements from the Basel Committee on Banking Supervision have made holding bonds more expensive for dealers. 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.

Tradeweb is owned by Thomson Reuters Corp., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG, UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc.

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.

MarketAxess, BlackRock

Part of the move by Tradeweb may be in response to a joint initiative by MarketAxess and BlackRock Inc., the world’s largest asset manager. After creating an internal electronic bond-trading system in 2012 that failed to attract enough customers, BlackRock decided to route trades through MarketAxess’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, three people familiar with the matter said in November. 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, the person familiar with how it works said in November. That could allow two asset managers to trade directly with one another, preventing dealers from participating in and profiting from the transaction.

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