There are substantial opportunities for trade matchers in the liquidity-challenged institutional credit market, but the challenges and risks may be at least as formidable.
That peril was underscored last week with the sudden and unexpected liquidation of Bondcube, the electronic trading platform that had launched less than four months earlier.
Bondcube had seemingly checked all the boxes necessary for a startup to get off the ground -- regulatory approvals, senior leadership with deep industry experience, and a prominent investor in exchange-operator Deutsche Börse AG. And there was no shortage of underlying market demand for the liquidity it tried to corral onto its system.
But things didn’t go according to plan. As Deutsche Börse said last week, “sufficient business prospects failed to materialize and as a result the long-term financial viability of the business deteriorated.”
It's unclear whether Bondcube didn't work strictly due to market conditions, or perhaps was internal discord that expedited the shutdown. "Bondcube has a great model, and it’s a shame that they couldn’t continue on long enough to properly test the approach," said Kevin McPartland, head of market structure and technology research at Greenwich Associates.
While the timing of the Bondcube failure took market participants and observers by surprise, the firm will have company in the graveyard of electronic fixed-income trading platforms before too long. In March consultancy GreySpark predicted that most of the 40-plus newer names in the space will have failed within three years.
The proliferation of new entrants is somewhat reminiscent of the late 1990s and early 2000s, when the internet boom ushered in a wave of online bond-trading concerns. The backdrop is different this time, but expectations are similar: only a select few will survive.
“The fixed income platforms that survive ‘Platform Wars 2.0’ will have a market structure that builds from where the market is, with greater liquidity provision from alternative providers and the buy side,” said Brad Bailey, capital markets research director at Celent. “The history of electronic platforms, in any asset class, proves that the fight is long, so staying power and the ability to adapt are crucial.”
The liquidity shortfall that has beckoned to innovators has its roots in sell-side capital constraints, i.e. big banks can no longer be relied upon as fail-safe trading counterparties. The market dynamic has the attention of the buy side, which needs liquidity for efficient trading of large positions.
“There are a variety of dynamics at play including extraordinary monetary policy, increased bond issuance and regulatory reform, which has contributed to reduced dealer inventories and lower turnover,” BlackRock Chief Executive Officer Larry Fink said earlier this month on the asset manager’s earnings conference call. “While media attention has only spiked in recent months, BlackRock has been focusing on the issues for several years -- how to enhance our trading capabilities, how to enhance our portfolio construction and risk management, as well as being a thought leader on the topic.”
“It is important for all market participants to recognize that we can't turn back the clock,” Fink continued. “We need to shift the dialogue to look forward and focus on solutions.”
BlackRock has made recommendations on possible remedies in a three-pronged approach, which includes modernizing market structure, addressing liquidity challenges at the product level, and embracing product innovation like fixed-income ETFs.
Feature image by Photocreo Bednarek/Dollar Photo Club