Byline: Phillipa Leighton-Jones
Life looks good for bond trading platforms that survived a ruthless shakeout which led to the closure of many of their peers over the past two years.There are several reasons. First, volumes in the fixed-income markets have surged as disastrous stock markets repel investors and spell the end of the equities boom. The fact that the amount of bond trading has risen has had a corresponding positive effect on the fixed-income networks.
Greenwich Associates, the US-based consultancy, says the total volume of institutional fixed-income trading in Europe and the Middle East has jumped nearly 25% this year, to over $11 trillion ([euro]11 trillion).
The proportion of institutions trading government bonds online is up to just over 30%.
Peter D'Amario, a consultant at Greenwich Associates, says: "All fixed-income trading in Europe is up substantially." Total average volume is up 24%, with volume in governments up 34%.
Bond asset holdings have risen similarly - with total assets held up 28%, and governments up 32%. Trading has been robust not only in aggregate but also across specific products.
Second, pressure to cut costs has prompted a re-evaluation of electronic trading, which according to some estimates undercuts telephone trading by up to 50%. As dealers become more comfortable with screen trading and more liquidity moves to screens, trading bonds online becomes a much more viable proposition.
John Unwin, technical director at EasyScreen, which develops trading screens, says illiquid bond markets are now overcoming the difficulties of moving from telephone-based trading to the screen.
"The internet can improve the bond markets by increased access to real time front-end cash and derivative trading systems, including distribution to global retail clients.
"The advanced technology that has emerged to meet the intense demands of the derivatives markets is now being applied to bonds. The accommodation of bonds by these sophisticated trading screens means that derivatives can now be displayed and traded against an underlying cash bond on the same screen, injecting major trading efficiencies and cost savings into the hedging process."
Results for the various dealing networks reflect this. Espeed, the electronic trading subsidiary of money broker Cantor Fitzgerald, and which racked up cumulative losses of $60m since it floated in 1999, has had its fourth consecutive profitable quarter.
Howard Lutnick, president of eSpeed, says: "Volatility has been our friend, and we've seen huge volumes in the Treasuries markets over the past quarter."
He is now focussing on creating the next generation of trading products which will enhance best execution and create auctions to find prices in less liquid bonds.
TradeWeb, the online fixed-income exchange owned by eight banks, set a daily volume record of [euro]5.3bn ($5.15bn) for its euro sovereign product in October, reflecting the demand for fast access to liquidity in volatile market conditions.
At the same time, daily trading volume on the exchange passed [euro]70bn. Since its launch in 1998, more than 2.5 million trades have been executed on TradeWeb, with total volumes exceeding $16 trillion.
BrokerTec, owned by a consortium of banks but which will shortly be acquired by Icap, the money broker, has transacted more than $50 trillion in fixed-income securities since it began operations in June, 2000. It set a record for a single month in October as transaction volumes totalled $3.8 trillion. Strong transaction volumes in US cash products, US repo and European repo contributed to the figure.
Garry Jones, president and chief executive of BrokerTec Europe, says that at the same time paring fees back to a minimum, BrokerTec is focusing on other ways to help members cut costs in their back offices. …