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.

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