Magazine article American Banker

Online Bond Trading Platform Planned to Streamline Market

Magazine article American Banker

Online Bond Trading Platform Planned to Streamline Market

Article excerpt

A joint venture among four Wall Street powerhouses to create an online trading system for mortgage bonds is a potential boon to investors and lenders but a threat to interdealer bond brokers.

Last week, Bear, Stearns & Co., Credit Suisse First Boston, Lehman Brothers, and Salomon Smith Barney said they had formed a venture to create an online bond trading platform that would handle trades of mortgage- and asset-backed securities.

In its initial phase, scheduled for the first quarter of 2001, the platform would let the four dealers trade Fannie Mae, Freddie Mac, and Ginnie Mae bonds among themselves. This would let the dealers trade securities faster and thus at lower cost than traditional trading by telephone or fax.

The dealers also stand to save money by eliminating a middleman: the interdealer broker. Companies such as New York-based Cantor Fitzgerald Inc. and Tullett & Tokyo Liberty PLC handle trades of bonds between dealers and charge commissions for every trade. Online trading would cut out these intermediaries. Cantor and Tullett did not return phone calls requesting comment.

In the second phase investors are to be allowed to trade on the platform, and the mix of securities will be expanded to encompass all types of mortgage- and asset-backed bonds. This expansion is expected to benefit both investors and lenders.

Investors would gain because they would see bond prices on their computer screens instead of relying on quotes from dealers. One buy-side trader in New York, who did not want to be identified, said increased price transparency would shrink bid-offer spreads, or the difference between what buyers bid for bonds and what sellers offer, thereby making it easier to trade bonds.

The increased liquidity would also be a plus for mortgage lenders that securitize their loans. In late 1998, in the aftermath of the Russian debt crisis, Wall Street dealers drastically cut back on how much capital their traders could use to trade bonds. …

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