Mostly… fixed income and cross product eTrading

What customer would be happy to go to a nice snazzy shop, to check the marked pricing while getting the goods off the shelf, only to get to the till –

A. to find there is nobody available to sell you those particular goods.

B. to be told no thanks.  The shopowner/till assistant has rejected your offer to buy that particular thing.  To you this isnt for sale.

C. to be told that the price of those goods (to you) is not as marked.  Maybe you’ll be offered the goods at a different (worse) price, or maybe your offer will be rejected (see B.)

Actually lets make this worse.  Lets assume that the shop is actually some form of shopping club.  So you have to be preapproved and have an account setup at the shop before you can actually get in the door to browse the shelves.  So if you were the customer, with your preapproved account setup, wouldn’t you want to know that if you took the trouble to actually go to that shop, you’d be able to buy the goods that were offered to you, at the price shown?  (Also how long would you bother to shop there if they behaved as above?)

Well, this is how it works for price orders in the electronic fixed income space. Here an enabled customer can see the dealer’s pricing and sizes. They can click on the price and send the dealer their price order (“I’d like to buy/sell N of that instrument at your price X“), but the dealer can then just treat the incoming order as an option to trade and so:  ignore the order (A. above),  reject it outright (B.),  or counter the order (C.).  Or of course they can accept it.

Generally customers should now expect to get a better certainty of execution by sending inquiry (/RFQ) instead of a price order – as sellside (surely all sellside??) have automation engines able to receive and price the inquiry based on their relationship with the customer (yes, tiering). And with this automation, there should be little “embarrassment” for customer in sending through inquiry for very small sizes;  with this automation nobody has to manually price each inquiry. Lets take a peek at the FX world – where you see a price (rate) with size in an etrading venue/stream and you can be fairly sure that it’s a genuinely executable price. Why shouldn’t fixed income be like this? OK, the universe of fixed income instruments is much broader than fx currency pairs; so lets just work on the liquid instruments first.

 So question to market-makers, why can’t you accurately and consistently price your (say) top 100 issues/issuers in order to offer your customers an absolutely genuinely executable price feed? If you quote the price with size in the feed, why is it not out there to be executed???  Seriously. If there are technical problems with the pricing engine for those 100 issues, then you really do have some pretty serious tech problems. Perhaps it’s time to ditch the concept of existing price orders in the fixed income world and the history that goes with this type of order.

If as a customer you need the pricing option of streaming pricing then take the quoting concept from other product areas, perhaps in particular the Request for Stream from FX or getting a market quote in equity space (so customer says I’m looking to trade this baby so please stream me bid+ask price for the next ~ 60 seconds) and the dealer does this [tiered by the automation engine!] specifically for the trade they’ve indicated interest in. The sellside can automate their pricing, the customer gets a certainty of execution for click-and-trade on a price stream as it’s genuinely executable, and even the regulators should be happy that the bid/ask spread is clearly known/disclosed pre-trade.

The Tradeweb Europe credit bonds segment places them directly head to head with Marketaxess Europe. But the shockwaves are likely to be felt much wider than just in those two platforms.

While we do hear some customers saying they plan to use Tradeweb instead of Marketaxess exclusively within the foreseeable future, I have yet to hear of any customers saying their strategic choice is to keep Marketaxess for their credit bond trading.

This could be partly because Tradeweb, with the advantage and also challenge of being last to market, have got more bells and whistles appealing to the market participants (buy+sellside) in their credit segment. But I suspect it’s mostly because Tradeweb are building on their hearts-and-minds strengths in Euro Govvies within the institutional customer base, many of whom are the same customers who’ve been using Marketaxess for credit. Tradeweb now offer a single and trusted application for govvy and credit bond trading, so why would you choose to run and support disparate and unintegrated apps – unless doing so gives you access to liquidity you can’t get elsewhere?

If that’s the case, then the tipping point into Tradeweb Credit is the availability of liquidity equivalent to that on Marketaxess. With Tradeweb aggressively chasing and enticing dealers to fill any inventory gaps asap, is time genuinely running out for Marketaxess Europe?

So will Reuters step in here? The RTFI platform is 18 months old. It’s up. It’s working. But an injection of institutional customers and institutional flow which would be achieved by buying Marketaxess Europe (or some form of JV to at least host it within RTFI), would cement its position as a serious contender in the electronic fixed income space in Europe. Reuters then clearly offer a single application for all bond classes building from an actively trading institutional audience [as inherited from Marketaxess].

Of course the point that the customer changes their daily behaviour (/workflow) in order to trade somewhere other than in Marketaxess, is also the point that Tradeweb Credit is reviewed and seriously considered as a potential does-everything venue of choice. Though… building on that does-everything thought, if Reuters got their act together on ensuring the integration of RTFI with RTEX and RTFX is truly available, then they clearly have a broader integrated offering than available elsewhere….. Except of course IRS. Reuters don’t have an electronic offering for IRS. But of course they could strike a deal with Liquidity Hub to host the collective electronic IRS offering, making RT?? genuinely cover all of the bases. Alot of if‘s, but Reuters certainly say they are serious about defining and establishing their electronic trading presence/footprint….

But it’s not a slam-dunk. If there are to be discussions about buying/hosting Marketaxess Europe flow, I’d expect Bloomberg to be in the middle of these too, in order to demonstrably take AutoEx away from being just a retail/odd-lots venue (its not, but perception remains that it is), and of course as a defensive move to stick one in Reuters eye.

Thus Tradeweb launching their credit bonds segment really could dramatically change the landscape in Europe.

Watch out for Liquidity Hub (nee Hermit – good article here) – as this initiative has potential to fundamentally change the etrading market.

The change will not be instant (don’t expect the platforms to tear up existing dealer agreements), and the consortium itself may not survive as-is (with that many dealers around the table there is always the threat of differing agendas spoiling the deal), but this is the first major and coordinated challenge to the current model where dealers pay big dealer fees and also execution charges to send their liquidity to the etrading platforms.

While focus is on the dealer to customer IRS market, probably between 5-10% electronic at this point, the crosshairs are already and absolutely pointing at other product classes.

With spreads ever shrinking and a regulatory focus on transaction costs, dealers are rightly questioning all of the costs in executing in particular venues. The Liquidity Hub initiative will, just by having tough discussions with the existing platforms, help shape dealer/platform relationships going forward. Is there really any genuine reason a fixed income dealer should pay more in annual fees just to participate in a fixed income electronic venue as opposed to, say, an equity exchange? And why shouldn’t the dealer who is market-making get some of the value realised from their doing so? (check out etrading’s blog for an indication of why a market maker’s prices in an OTC market are of increasing value the further down the liquidity curve you go).

It seems fair to expect some strategic alliances/rationalization among the platforms, which I’d expect to be announced in the foreseeable future, that are triggered by/resulting from the dealer focus on costs.

What does this mean on the customer side? I don’t see room for the platforms to charge the buyside/customer for execution unless they are delivering a very specific (and quantified valuable) value-add. As I’ve said before customers aren’t using all of the functionality that’s available “free” now even though it would improve their transaction workflows, so I don’t see where charges would be accepted. The rumblings of Liquidity Hub do present a window of opportunity on the customer side though: why not ask your dealers if you can get a better price by executing the transaction in a particular channel/venue (yes, include voice in the comparison). Of course, when you’re already getting a choice price on the electronic platform then there really isn’t a lot of room for a price improvement, but it would make more sense to ask “can you improve?” and work out some form of strategic deal to build on for the future, rather than just to ask for an improvement on each individual trade you phone in to the salesperson. And the dealers really should all have an axe on this!