mike, Have you read this?
Tough Battles Loom for Electronic Bond Trading
By Ross Finley
dailynews.yahoo.com
NEW YORK (Reuters) - After a year of botched start-ups and the Sept. 11 attacks that wreaked havoc on U.S. bond markets, 2002 will probably see more systems shut even as trading slowly shifts from telephones to keyboards.
A powerful recession, led by a dramatic pullback in capital spending on technology that has yet to turn around, helped in 2001 to snuff out nearly a third of the e-bond platforms in existence a year ago.
With most of the $3 trillion Treasury market already trading online, the e-trading battleground for surviving firms, like MarketAxess, BondDesk and ValuBond, will center on other fixed-income markets that trade corporate, agency and mortgage-backed securities, which total $15 trillion.
Success for the big players in the Treasury market, like TradeWeb, eSpeed (Nasdaq:ESPD) and BrokerTec, came relatively quickly, offering users speed and huge cost savings.
But the coming battle for market share in these sister markets that thrive on a closely knit web of dealers and customers accustomed to doing business over the phone will probably come much more slowly.
``Although the record to date in electronic trading systems has been less than stellar, I would expect that the systems that are remaining that have proved their mettle will continue to gain traction,'' said Andy Nybo, an analyst at TowerGroup, a technology research firm in Needham, Massachusetts.
LESSONS LEARNED FROM TRAGEDY
When airline hijackers destroyed the World Trade Center on Sept. 11, hundreds of bond market professionals were killed. One firm, Cantor Fitzgerald, already part-way through a campaign to shift much of its phone-based brokerage business online, was forced to rely entirely on its eSpeed (ESPD.O) e-trading arm to operate its core U.S. Treasuries business.
The devastating attacks also hit the heart of the bond market's infrastructure, triggering shock waves in the weeks afterward as a pile of uncleared and unsettled trades turned into a mountain of dealer trouble. Wiped-out phone lines also forced many to rely on electronic systems.
Many industry professionals say the chaos ensuing from failed trades only sped up the need for firms to invest in technology and to use electronic systems that can be backed up and operated from multiple locations.
In a related effort, industry professionals are pushing to develop common standards so the multitude of systems and platforms are able to communicate. But industry executives say agreement and action are years away.
SWITCH TO E-BONDS SEEN SLUGGISH
While the $3 trillion U.S. government securities market easily switched over to electronic trading in just a few years, corporate bond and other so-called sister-markets, such as mortgage-backeds and municipals, in the $18 trillion fixed income markets have not adapted so easily.
Part of that has to do with the multitude of individual bonds and the fragmented nature of the bond market. In the world of stocks, which has a limited number of securities and lends itself more easily to centralization, about a third of Nasdaq trading is electronic.
By the end of 2001, only about 2 percent of corporate bond trading was done electronically, up from 1 percent in the prior year, according to TowerGroup. That is expected to climb to 5 percent in 2002. Figures for municipal bonds are similar.
By contrast, about 90 percent of the interdealer-broker transactions in Treasuries were done electronically in 2001, up from 76 percent in 2000. TowerGroup expects that figure to rise to about 95 percent next year.
In the dealer-to-customer space, where Wall Street dealers trade with investment management firms, about 12 percent of Treasury trading was conducted electronically -- and almost entirely by one firm, TradeWeb. TowerGroup expects that figure to rise to 15 percent by 2002.
MORE CONSOLIDATION SEEN
Four years ago, there were only 11 e-bond trading systems based in the United States. That number grew to 68 a year ago, but has since dropped sharply, to 49, according to the Bond Market Association, an industry trade group.
One of the most visible casualties this year was BondBook, backed by eight top Wall Street investment banks that withdrew their financial support shortly after Sept. 11, shutting down a platform launched only a year earlier.
Rick McVey, chief executive of MarketAxess, a multidealer-backed system that recently swallowed up one of its smaller competitors, TradingEdge, underscored the investment needed to build good systems that will grab market share.
``At this year-end I think there are far fewer likely winners, and that's been a healthy thing for the industry.'' |
