Before I get started on my rant about Credit e-trading in Europe, can I please state two things:

1) Categorically I am a believer in credit for Fixed Income! Corporate Bonds, Subordinated debt, MBS, ABS, CDO, CLNs, FRNs (I don’t think of Supras, Agencies, Pfanbriefe etc as Credit in this context)….I believe, I truly do. Whether the spreads are far too narrow in relation to the risk is another matter and not for a blog on e-trading.

2) e-trading for Credit in Europe works for retail flow. Bloomberg do a great job of executing these essentially very simple trades, Reuters not quite as good a job,……because it is all about the price/yield the less than sophisticated end user wants. It is all about getting a massive number of small tickets done as efficiently as possible.

Now to the crux of this piece: E-trading for Institutional Sized Cash Credit in Europe has Failed.

You all agree? No? Is it only Market Axess & those at TradeWeb who joined for the Corporate offer that disagree? Or maybe the handful of institutional clients across Europe that do anything resembling a material % of their trades (not necessarily volume) electronically?

It is debatable as to whether it has failed or is failing. I prefer to be a bit more definite as I think the future doesn’t hold great hopes for the development of cash credit bonds electronically.

Liquidity is poor, for mostly obvious reasons, and getting worse – note the huge amount of M&A work that is being financed by various complex loan arrangements rather than bond or equity issuance. 2006 looks like being a very sad year for new corporate issuance….but have no fear bankers, your M&A guys have more than made up for it! As we all know, Liquidity is vital for a product to be sucessfully supported electronically.

The structure of the market isn’t conducive to e-trading. By this I mean the way institutions trade, spread vs. swap, spread vs. govt etc and of course the ovious fact that you have so many issues by so many different issuers with each issue often having a limted number of banks supporting it etc, thus rendering inventory as a major driver of liquidity. This is stating the obvious and yet many ECN’s continue to try and ram corporate bonds down people’s throat electronically, whilst essentially following the government bond model of CRFQ & trading on price.

The likes of Market Axess & now TradeWeb have clearly focused on the institutional side of credit. However MA have never been a raging success in Europe (The US is very different given the deeper and more mature credit market there) whilst the TradeWeb offering has been luke-warm  at best – in fairness it is still early days, but I don’t see it really taking off.

Can the Banks & ECN’s do a better job to meet institutional needs in this space? The answer is yes, but I can’t see them replicating phone/block trades to a satifactory degree…..primarily because of the liquidity factor – so ECN’s can continue to blame the Price Makers!

In my opinion, the real death-knell will be when single-name CDS goes electronic…..within the next two years. Liquidity will be far better, hedge funds will be more involved. Corporate Bonds will remain as important as they are now, to institutional investors, but I just don’t see how they are traded, electronically, developing enough over the same period.

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