July 2007


Looks like LiquidityHub launch will be pushed back a few weeks to October 2007. Makes sense given August is such a non-event (usually, see here) in Europe.

Can only think the decision to launch in the first half of September was taken out of NYC!

The world’s pre-eminent Fixed Income buysider tackles the vulgarity of the uber-rich and draws parrallels with the current credit blowout in his latest Investment Outlook. Always well worth a read for those of you interested in current macro market issues.

Being, as I understand, big users of TradeWeb and MarketAxess, I’m still waiting on him to write one on FI e-trading. 😦

I’ve just had a hard copy of the Bearing Point Electronic Bond Market 2007 survey come across my desk. No idea when it came out, other than it was this year. I can’t say I was aware it was out beforehand but had seen their 2005 version.

I won’t go through it in detail, as much of the detail is going over old ground, however there were some interesting findings on the share of e-volumes in B2B and B2C markets as well as some potentially provocative points in the conclusion. The survey respondants, as far as I can tell, were sellside only.

* B2B Volumes (where the only Cash Bonds are involved in the transaction, i.e. no bond/futures basis trades): MTS 80%, HDAT 15% (Greek market that big?), Eurex Bonds 4% and Senaf 1%. Volumes stagnated between €16-18 billion a day (voice ex. basis trades estimated at €17 billion a day) with little scope for volume growth in the next few years.

* B2C Volumes: accounts for 40% of Euro Government Bond Trading (grew by between 7-10% in 2006). TradeWeb accounts for 52%, BondVision 21%, Bloomberg (ex. single-dealer) 21% and Other (RTFI etc) 2%. Doing some rough maths this should mean approx. €10 billion per day (sounds about right) in B2C Euro Govt e-trading, however the 40% doesn’t quite add up. I can only guess they mean 40% of customer flows rather than all turnover.

* The survey expresses some surprise at tighter spreads in B2C vs. B2B. However that is easy to explain as banks are happier to price for clients than competition, especially when they are obligated to quote at a certain min. spread (MTS) in B2B and that min. spread is no longer reflective of the broader market. In saying that, good luck to MTS if they chose to tighten it!

* Longer-Term Conclusion:
– US Treasury market still dwarfs Euro Govt market (approx. $500 bn a day versus equivalent of $90 billion a day) due to European fragmentation. One solution is for EU Debt Agencies to form a Super Debt Agency (call it the EUDA) where all Govt debt is issued by one issuer (say the EU) which will provide more liquidity and lower the funding costs of member states. Hmmmm, I’d guess that has as much chance of happening in the next 10 years as peace in the Middle East. I like the idea but how do you get agreement on how to split the €€€€€’s between the nations? Anyway it would solve the problem of members breaching the Stability and Growth Pact! 🙂
– Banks should utilise Algorithmic Trading along the lines of UST market and introduce non-bank players – much as MTS have thought about – thus beggining to merge B2B with B2C and also bringing in voice (via a Bond version of Swapswire) to form an exchange model.

The conclusion offers major changes to the structure of the European Bond Market, however it is a bit short on detail as to how this would actually work in practice. Not sure they’ve given it enough thought.

Just read a piece from Fortune covering the much covered “London vs. New York, who is the King of the Financial World” debate.

“20th Century Fox is reportedly basing the sequel to Wall Street, the hit 1987 movie in which Michael Douglas declared “Greed is good,” in London.” They’re making a sequel? Brilliant! Gekko tracks down Bud Fox in a swanky Mayfair eatery?

Anyway, this is probably the only part of the article you’ve not already seen in The Sunday Times or Economist.

* Nothing to compare with what is happening in the West Country, Up North and Wales, but the waratah cellar had an inch of water in it on Friday.

As terrifying (if you are a former Citi trader) as the prospect of Carrie and her pals returning to our screens, it appears the seven ex-Citi traders involved in the August 2004 trading scandal over MTS are to be indicted in Italy.

The trial is due to start on 30 October 2007………and if the seven traders hire a certain Signor Berlusconi as a consultant, they may be able to drag out the trial until August 2011, at which time the statute of limitations will see them right. 🙂

Speaking of MTS, not much noise on the Hedge Fund/Prop House joining the MTS markets front. Was this the baby of Messrs Garbi and Rakotavao?

In one of my first blogs last year, I mentioned that e-trading in institutional cash credit had failed, or was in the process of failing. Most comments seemed to agree, placing the blame on the market structure, dealer commitment and ECN functionality.

I thought it was time to revisit, especially after chatting at length, last week, with a few people with a vested interest in credit e-trading (cash and to a lesser extent derivatives). After the chat I wondered “had I been too negative back in November?” Well let’s have a look at why they feel the market has much more room for growth.

* In terms of credit e-trading, they see a future with cash as the core, with CDS remaining as “potential” for a while (at least another two-years until the banks let it go) – although they see some appetite for CDS list business with MarketAxess and Creditex Q-wixx. Primarily as dealers see more STP benefits than price transparency costs.

* Word is that the controversial MarketAxess fee system of charging the buyside has had little effect on volumes – remaining around the €8-9 billion a month, although it is early days. This tells me that they’ve done a good job selling the idea to their existing, loyal customers, but how do they grow the business when they are alone in charging the end-user?

* Can see cash volumes moving from the current 15% electronic (thought that was a touch high?) to 40% over the next two-years. When I asked how, they feel it will come via bigger tickets (€5m+) being traded electronic. Now this is a bit obvious so I dug a little deeper. They see this break of the €5m ceilling coming via tradable axes distributed to tier-1 buyside counterparts and single-dealer sites (be they proprietary or hosted by an ECN).

* One suggestion to “protect” the price makers on these axes would be for them to display the size (bid or offer) only and then for the client to send an RFQ (Personally I can’t see how a tier-1 fund or hedgie would entertain this model. What they’d want is size, price or spread and be able to hit it).

So, was this enough to convince me that institutional cash credit e-trading has a brighter future than I first thought? Essentially, no it wasn’t.

It makes sense that some larger deals will go “e” if the banks and their vendors get the tradable axes piece right, but it would require more structural change in the market before it could truly become a strong e-product. Given the current outlook for credit, this is unlikely to happen soon. For mine, the likes of CDS (indices and single-names) are the way forward for e-credit – but I agree it will be a good two-years before anything significany happens, perhaps in the form of a LiquidityHub type deal or indeed via LiquidityHub if it is a success.

Interesting article in The Sunday Torygraph this week re: Reuters selling (unlikely) or closing (more likely) RTFI when/if the Thomson takeover goes through.

Essentially it is stating the obvious, that TradeWeb would become the FI e-Trading offering of the new Thomson-Reuters entity. It really would be a no brainer given the relative success of TradeWeb to RTFI.

The interesting question is how TradeWeb and LiquidityHub will live together within New Reuters……

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