'All to all' is the current catchphrase in fixed income trading, as new platforms emerge that allow buy-side traders to connect with each other, on the presumption that dealer liquidity has withered in the era of Dodd-Frank and the Volcker Rule.
While these all-to-all platforms may be great for the buy side, broker-dealers also need to source liquidity, and with that in mind, Codestreet, a provider of fixed income matching and liquidity discovery tools, last year launched Codestreet Dealer Pool, an anonymous dealer-to-dealer only electronic trading platform designed to generate new liquidity.
CDP builds on Codestreet’s Teamwork, which enables bond dealers to coordinate their sales and trading functions.
“Codestreet has been focused for many years on helping broker-dealers in the credit markets find the other side of the trade and do more 'riskless' business,” Howard Pein, CEO of Codestreet, told Markets Media. “That's been the driving impetus for the company for many years, which is about creatively helping our customers, the broker-dealers, identify high-value trading opportunities that they can then communicate to their customer base.”
Codestreet Dealer Pool expands on the Teamwork concept, Pein said, “by allowing the dealers to intersect the liquidity that they have within their firms with other dealers within the broker-dealer community, thereby allowing people to use a virtual balance sheet of their fellow broker-dealers instead of having to warehouse funds and use the real balance sheet, which is such a problem today given Volcker and Basel III.”
Since launching last year, CDP has met with enthusiastic response from the dealer community, which has had to stand by and watch as a parade of buy-side platforms are launched.
“There’s been a plethora of introductions of credit trading platforms, the vast majority of which are attempting to disintermediate the broker-dealers by going to an all-to-all model, on the assumption that the bonds are all held by the buy side, and that the sell side is no longer providing abundant liquidity and immediate liquidity,” said Pein.
Codestreet’s view is that “the broker-dealers are going to remain central to liquidity provision in the credit market,” said Pein. “Technology such as the Codestreet Dealer Pool is going to help them do that by allowing them to use a virtual balance sheet as opposed to a traditional balance sheet. That has resonated extremely well with the dealer community.”
Cerium Technology, a venture capital firm, has taken a stake in Codestreet, which will help accelerate the growth of CDP, and by extension try to solve the liquidity challenges of the corporate bond market. “What this investment allows Codestreet to do is to really flesh out the offering to gain a lot more liquidity and a lot more traction in the market,” said Eldon Klaassen, managing director at Cerium Technology.
Klaassen, who has more than 35 years’ experience as an entrepreneur in financial technology, said that Codestreet Dealer Pool fills an unmet need by dealers for sourcing liquidity. “We've identified the structure of the industry as revolving around the dealers, and CDP is a dealer-centric model,” he said. “We believe that Codestreet’s existing liquidity and its software products are going to enable the company to become a leader in alternative trading systems for the fixed income space.”
Featured image via Edo Nicolino/ Dollar Photo Club