Singledealer vs. Multidealer platforms in Credit, is that the question?
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2013/08/29Joséphine de Chazournes
Summer holidays offer for some of us time to break away from our daily routine, newswires, and analyst reports! For some others it is actually a great time to catch up on what was not read in the past few months. As I am in the first category, I had the pleasure of reading a very interesting piece of research on Credit e-trading as I got back to my computer. This was especially insightful for me as my US colleague, David Easthope, and I follow this topic amongst other themes, and because I am currently updating our yearly European fixed income market sizing report (here is the 2012 sizing report: Fixed Income in Europe: Ready for the Tornado?). What I found most interesting in that report was that it highlighted the fact that, though much innovation is taking place to try to curb the lack of liquidity in secondary corporate bond trading both in Europe and in the US, whether through Order Books (OB) or auctions or hybrid systems, cf also Dave's recent report: Innovation in Focus: Electronic Trading Platforms in US Corporate Bonds, the general feeling of investors is that the incumbent Request for Quote (RFQ) Multidealer-to-Client (MD2C) trading platforms will keep their high share of the corporate bond market, and that they are skeptical about Singledealer-to-client (SD2C) platforms. Though I have no doubt that MD2C Bloomberg, Tradeweb and MarketAxess, amongst others, are working on improving their offering to impede the newbies from taking market share away from them, I do think they are going to have to fight hard to stay ahead in Europe in a levelling to tightening corporate bond market (vs. European govies volumes which have seen a staggering growth in 2013 vs. 2012). Why is that? Transparency requirements and Feer of near-Duopoloy. Transparency requirements in Europe will come in corporate bonds through the MiFID review, mentioned in our recent MiFID II Pre- and Post-Trade Transparency: Is There Light at the End of the Three-Year Tunnel? report, which could in the end greatly be influenced by EMIR, i.e. OTC voice trading could very well be banned in liquid corporate bonds. When investors will realize that some dealers can actually provide them with best execution through smart order routing to RFQ, OB and hybrid systems (cf the 2012 Technology in European Fixed Income: Time to Open Pandora’s Box report), or better, when investors themselves will have invested in such capabilities, I think competition will truly heat up between SD2C and MD2C platforms in the most liquid corporate bonds and/or small size trades (50-100,000Euro trades), not fogerting the retail OB platforms. Feer of near-Duopoly comes from the fact that dealers do not like to leave too much control of their trading activities to one or two entities, hence their currently trying to decide on which new hybrid model to bet (and invest in as a consortium?) for the larger sizes and/or most illiquid bonds, hoping to solve their liquidity issue. Last but not least, I get a lot of inspiration for fixed income in FX. It generally provides me with better inspiration for the rates business which, like FX, tends to have continuous liquidity and be a homogeneous market vs. credit which tends to have episodic liquidity and be a heterogenous market. However, the aggregation theme has become hugely important in FX, between wholesale and institutional platforms, between retails and institutional flow, at SD2C platforms, from technology providers, etc. That part of FX for me shows how SD2C platforms can have an aggregation edge between wholesale and institutional business, between institutional odd-lot and retail trades and between various platforms. Simplistically: think SEF aggregator for corporate bonds. Thinking of the desktop space optmization issue that investors often mentioned, I would like to share two scenarios:
- Scenario for the SD2C to keep a slot on the desktop is a combination of extremely modernized chinese walled and balance sheet optimized platform that aggregates, routes and matches as much investor flow as possible (some of it coming from MD2C RFQ platforms, some of it not) but also takes part in a Multidealer (not to client) consortium-like platform for their unmatched inventory and/or for the large size enquiries/indications of interest of their clients? It could be that some clients prefer to have 2-3 really good relationships with 2-3 dealers that have SD2C platforms that serve their particular needs (algos, primary issues, inventory, etc), and use their desktop space for these 2-3 venues rather than having to link up to the many MD2C platforms.
- Scenario for the MD2C to keep their currently extremely robust slot in the desktop of investors, before all investors get extremely robust OMS and EMS technology to buypass the MD2C (not soon!) or go for the SD2C-only route, could be to enable wholesale, institutional and retail flows to interact. In CDS indices (which are liquid) we have seen how Tradeweb has gained more than the majority of market share by doing that (and not only): enabling investors to stream wholesale liquidity. Could it be done in corporate bonds? There is currently no interdealerbroker (IDB) e-trading taking place in corporate bonds but could a MD2C platform add that IDB2C functionality? You can read more about IDB2C in The Blurring of the IDB Vs. D2C Models in Fixed Income and FX report. The alternative would be for the MD2C to offer the credit OMS/EMS technology to investors, and some are already working on this.