Bond Market Overhaul Requires Patience for Tradeweb CEOMatthew Leising
Even the man behind the latest attempt to change how Wall Street trades corporate bonds concedes it will take time.
Tradeweb Markets LLC said yesterday that its customers can buy and sell investment grade U.S. company debt on its platform starting today, joining other firms trying to bring the business into the computer age. Only about 15 percent of trading happens electronically, with the rest occurring directly among humans, said Tradeweb Chief Executive Officer Lee Olesky.
“Timing it right, when things transition, can be very difficult,” Olesky told a group of reporters yesterday in New York. “My caution on timing is it’s not certain this will happen in the next three weeks, three months or two years.” A slide he presented characterized it as a “gradual evolution.”
Tradeweb joins a list of firms that have tried to popularize bond trading over computers. Others include Goldman Sachs Group Inc., BlackRock Inc., MarketAxess Holdings Inc. and a slew of bank-led consortiums with code names like Oasis and Neptune. They’re trying to change a system where, for decades, buying and selling has taken place over the phone among investors who prize discretion in the thinly traded $7.7 trillion U.S. corporate bond market.
“It seems like everyone’s trying to find a solution and diving into the market, so we’ll see what works and what doesn’t,” said Mike Adams, an analyst with Sandler O’Neill & Partners LP who attended a similar Tradeweb presentation about the new system on Oct 27.
He said connecting asset managers to one another as MarketAxess is doing could be more successful than Tradeweb’s approach, which involves connecting banks to their customers. “I don’t think the trading protocol is revolutionary. What they’re doing that’s disruptive is the pricing,” Adams said of Tradeweb.
That’s because Tradeweb, which is majority owned by Thomson Reuters Corp. with the rest held by banks such as JPMorgan Chase & Co., Goldman Sachs and Citigroup Inc., will offer a flat price to trade. Other corporate bond platforms charge fees based on the dollar amount of bonds traded.
The fact that only 15 percent of the U.S. corporate bond market trades electronically is “really good evidence that something is amiss,” Olesky said. While Tradeweb views its largest competitors as MarketAxess and Bloomberg News parent Bloomberg LP, “most meaningfully what we’re going after is the 85 percent of the market that’s not electronic now,” he said.
The trading will offer a menu of options for investors, including live prices that are streamed from 30 market makers; request-for-quote protocols that can go to a few or all market makers; and pages to trade directly with a single bank. Additionally, he said Tradeweb may mimic stock exchanges with a central order book, which would let investors buy or sell with a single command.
“To say any one of these things is critical is an overstatement,” Olesky said. “These things take time, but we feel we are at an inflection point.”
The company has been testing the new trading for several months. About 25 percent of the buying and selling has been facilitated by the streamed prices, with the rest split between the two methods of request-for-quote trading, Olesky said. He declined to say what the average size of trades was during the test phase, or what the average gap between bid and offer prices was.
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.
Efforts over the years to marry computers and bonds haven’t been successful, Tabb Group LLC said in a 2012 report.
“The landscape is littered with spectacular -- and not so spectacular -- failures that may be familiar to bond market veterans,” Andy Nybo, director of derivatives at the research and consultancy firm at the time, said in an April 2012 report. “BondBook, Bond Connect, BondGlobe, BondHub, BondLink come to mind. And that’s only the B’s. Remember Intervest, Visible Markets or XBond?”