Deutsche Bank AG (DBK) is trying to drum up interest with some of its largest competitors to create a multi-dealer U.S. bond trading platform at the same time that asset managers discuss ways to make buying and selling debt easier, according to people familiar with the matter.
Europe’s biggest investment bank by revenue has pitched its plan for an electronic trading network to JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Barclays Plc (BARC), according to five people briefed on the talks, who asked to not be named because the discussions are private. Executives at State Street Corp. (STT) and FMR LLC’s Fidelity Investments are among institutional investors that have held a series of meetings, the last one in July in New York, to address the difficulty of finding the bonds they want to trade, according to two different people.
The bank discussions on forming a platform and asset managers’ search for solutions comes amid a 76 percent decline in corporate debt inventory at the world’s biggest dealers since a 2007 peak. The pullback by market makers, which is spurring concern that the risk of trading disruptions has risen, comes amid stricter capital requirements from the Basel Committee on Banking Supervision and speculation that the U.S. Dodd-Frank Act will weaken their ability to facilitate bond trades.
“The industry is making progress,” said Will Rhode, director of fixed-income research at consultant Tabb Group LLC in New York. “There are so many basic challenges, the market is fundamentally fragmented.” The multilateral approach envisioned by Deutsche Bank is catching on with market users, he said. “The technology certainly exists, the desire exists,” he said.
Private Transactions
Representatives for Deutsche Bank, JPMorgan, Citigroup, Barclays, State Street and FMR declined to comment.
Most trading takes place through privately negotiated transactions. Corporate bond dealers and investors have started to branch out into electronic-trading platforms as they seek to cut costs and improve their ability to convert investments into cash amid the new capital rules.
Goldman Sachs Group Inc., the fifth-largest U.S. bank by assets, has expanded its GSessions electronic-trading system. BlackRock Inc. (BLK), the world’s biggest asset manager, decided this year to route some of its trades through MarketAxess Holdings Inc. (MKTX)’s computerized system.
Bloomberg LP, the parent of Bloomberg News, offers trading of bonds and credit-default swaps through its fixed-income trading platform.
Wary Clients
While clients have been wary of trading on platforms run by one bank, broker-dealers haven’t agreed on parameters that would allow a single platform run by several companies to emerge, two people involved in the market said this week.
The platform, dubbed Oasis, from Frankfurt-based Deutsche Bank is aimed at the least-active part of the $4.2 trillion-a-year market where bonds might not trade for days or weeks, two of the people said. It follows a more successful introduction of the same idea in Europe, according to one executive.
Oasis clients would tell their bank how much of a particular corporate bond they want to buy or sell, a process known as an indication of interest, and the dealer would enter a resting order into the electronic system, two of the people involved said. If another party is interested and the trade crosses, the transaction would be done between banks so that the clients remain anonymous, the people said.
Information leakage, or the possibility of rival investors profiting off an investor’s plan to trade, is a major concern among bank clients that Oasis is meant to address, the people said. If the system succeeds, clients could eventually be allowed to access Oasis directly, they said.
Less Trading
Investors and their banks may have trouble moving more of the market onto computers. Corporate debt is unsuitable for full electronic trading, according to a study last month by McKinsey & Co. and Greenwich Associates. There are more bonds than stocks, and debt trades less frequently, making a full transition to computer-based buying and selling unlikely, the consultants said.
Dealers have resisted a shift to electronic bond trading because the increased transparency can cut profits. In the 90 days after the Financial Industry Regulatory Authority’s Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.
Investors Meet
Executives at Fidelity, the world’s second-largest mutual fund company, and State Street, the third-biggest custody bank, met in May 2012 with representatives from Deutsche Bank, Barclays, JPMorgan and Goldman Sachs, urging the dealers to develop an electronic-trading system for bonds, people who attended the event said last year. The group has held a series of meetings this year, some with only institutional investors present, some with only banks, and some with market vendors, two people familiar with the matter said this week.
New trading systems like Goldman’s GSessions are only part of the solution and other ways to buy and sell need to be developed, according to one of the meeting participants. These include electronic auction systems, a central database where limit orders are placed, and the resting order model like Oasis is proposing, the person said.
A continuing challenge is to get the banks to agree to support one solution, the participant said. Institutional investors met earlier this year to discuss a list of market changes they would like the dealers to implement, the person said, adding that a trading network that combined many ways to buy and sell debt in an aggregated fashion may be one promising idea.
The number of institutional investors participating in the meetings has grown to as many as 12 from 5 last year, while at least 8 banks have been involved, the person said.
Source : bloomberg
