Algomi, which builds social networks for the corporate bond market, expects to double the number of buy-side firms on its Honeycomb network by the end of this quarter and has formed its first partnership with an exchange.
When Algomi first launched it build smart internal networks for banks to help them transact less liquid corporate bonds. For example, the software helped collaboration across bank sales teams by making it easy to find out who spoke about a certain bond three months or three days ago.
At the end of last year Algomi added asset managers to the network so they can easily find the best bank counterpart for large trades.
Stu Taylor, chief executive at Algomi, told Markets Media: “We are under contract with over 30 clients and in legal negotiations with another 40 to 50 and expect the numbers to be very big by the end of the first quarter. Some enquiries on Algomi have been in excess of $100m while average trades on E-trading credit platforms are between $300,000 and $800,000 – it is clearly a very different business we are targeting with our offering.”
This week SIX Swiss Exchange said it launching an electronic platform for trading large blocks of corporate bonds in the first half of 2015 with Algomi as a technology partner. The exchange said the new trading model was developed in close cooperation with current sell-side participants. Algomi allows market participants to find each other and trades are executed electronically on the new regulated venue, rather than over-the-counter. The platform is aimed at executing illiquid corporate bonds and large trades of at least two million in Euro, sterling or US dollars.
Christian Katz, Division CEO Swiss Exchange, said in a statement: “Trading participants in this electronic platform will be able to transact large orders of bonds simply and efficiently via the new liquidity pool and exchange infrastructure. This not only lowers transaction costs but also improves risk management.”
The new platform is part of SIX’s Over the Exchange initiative to offer new exchange services. “We have been is discussions with SIX for almost two years,” added Taylor. “They were very visionary with us from the beginning and they are also very robust exchange operators.”
Other European exchanges have also launched their own bond trading initiatives as regulations have forced banks to cut the size of their fixed income portfolios and liquidity in secondary markets has fallen.
MTS, the London Stock Exchange’s fixed income trading business, has joined up with B2SCAN, a French platform which makes it easier for asset managers to search for a particular bond, or list of bonds, and then electronically execute their trades on MTS BondVision. B2SCAN allows banks to advertise the bonds they want to buy or sell to selected asset managers and users include Bank of America Merrill Lynch, HSBC, UBS Citi and Societe Generale.
Last year Deutsche Börse, the German exchange operator, acquired a minority stake in Bondcube, a London and Boston-based electronic fixed income trading system, which is not based on a buy-side request for quote to the sell side. Instead Bondcube is an all-to-all market where users post indications of interest and the platform finds matches and also analyses historic orders to find matches in infrequently traded bonds. In December Bondcube received regulatory approval to trade in 31 European countries.
SIX pays a licensing fee to Algomi, which does not earn any revenue from trading volumes. “Unlike the other offerings, Algomi is not trying to compete with the e-trading solutions,” Taylor said. “There has been a huge proliferation of bond trading systems from about 30 vendors and there will be a huge reduction. In the same way there were a huge number of SEFs which consolidated much quicker than anybody anticipated.”
He argued that all the new launches will also not have the appropriate capital and resources for the long run to challenge the big incumbents while Algomi is already earning substantial revenues from clients and is supported by Lakestar, the venture capital firm that backed Facebook, Spotify and Airbnb.
Taylor said that Algomi is positioned as an information network, not a vendor, and works alongside the banks.
“All the other models are trying to disintermediate banks and the client-to-client model has failed many times,” Taylor added.
Algomi will form similar partnerships to SIX in regions outside Europe. The firm’s live users are currently all in Europe but the firm is expanding in the US and Asia.
In New York Algomi recently moved to a larger office and as it plans to triple staff in the next year. This month Algomi recruited a head of Asia-Pacific operations to expand in Singapore and Hong Kong this year. “We are gearing up for scale and by the end of this year will be a lot larger in the US,” added Taylor.
Featured image via habrda/Dollar Photo Club