US corporate bond traders go electronic

The last bastion of wild west trading on Wall Street is coming under increasing scrutiny from regulators and investors.

Immortalised 35 years ago in Liar's Poker - Michael Lewis's account of his time as a bond salesman in the 1980s - nothing much has changed when it comes to buying and selling debt issued by America's biggest companies.

With most bond trades still executed by phone, and with little price transparency in the $10tn US corporate debt market, the situation is viewed by many - including big investors and regulators - with growing alarm.

But forcing change on one of the oldest financial markets remains difficult with a multitude of competing motives and proffered solutions at play.

"There are a lot of differing interests at play here and it becomes very difficult for people to trust them," says Amar Kuchinad, a former Goldman Sachs trader who is getting ready to start a new electronic bond trading platform. "This really needs to be solved somewhat independently of the current participants in the market - it needs to be refereed by somebody."

Banks have continued to underwrite debt sales for companies but new regulations that make it more expensive for them to arrange trades of bonds have sharply reduced liquidity in the so-called secondary market.

The big worry is that the corporate bond market, characterised by a high level of retail investor ownership, could well shut down should interest rates rise rapidly and record inflows into bond funds start reversing.

That nightmare scenario certainly has the attention of players in the market and also the Securities and Exchange Commission, which is looking to step up oversight of the sector.

"Bond market participants are rightfully afraid that when rates rise, the ability to exit the market will be far more restricted than in the past," Dan Gallagher, a commissioner at the US securities watchdog said at a conference last week in Washington.

Mr Gallagher outlined how the industry should strive for greater price transparency and address liquidity risks by adopting electronic trading, backed by the SEC, incentivising standardised debt issuance.

That comes as BlackRock, the world's largest asset manager, seeks sweeping changes in bond trading, including electronic trading platforms and quarterly debt issuance by companies, while pushing banks to take a leadership role.

"We have been in discussions about standardising bond issuance with US and international regulators, as well as issuers and underwriters," says Richard Prager, head of global trading at BlackRock.

For their part, the major banks have sought to ringfence their lucrative trading franchise by backing a new platform operated by Tradeweb, which is being led by a motorcycle-loving former Goldman trader called Cactus Raazi.

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The Tradeweb initiative was launched this year as part of an effort by banks to take back some of the market from rival MarketAxess and is still beta testing.

Meanwhile, new independent platforms - such as Bondcube, MTS Bonds.com and BondDesk - have mushroomed alongside more established trading players to proffer their own vision of electronic bond trading facilities.

Earlier this month Investment Technology Group announced it would begin offering a dark pool for 14,000 different corporate bonds. Liquidnet, which specialises in large "block" trades of stocks, is scheduled to go live with its own fixed-income trading platform as soon as next month.

Former UBS trader Stu Taylor has built a system - Algomi - that allows banks to keep better track of the bonds they buy and sell, essentially creating a social network from which they can source new trades.

Paul Reynolds, the former Citigroup trader who is chief executive of Bondcube, sees the potential for new technology to allow banks to handle their inventories of bonds more efficiently. "This is Wall Street and Silicon Valley together for the first time. Banks need to do that, they need to run their business more like Walmart."

Electronifie, the bond trading platform being created by Mr Kuchinad, also a former policy adviser at the SEC, aims to provide continuous pricing on debt and is slated for launch later this year.

"I think there's enough of a recognition that this is a problem right now and enough impetus for change, that two years from now we're going to see a lot more electronic trading of corporate bonds," he says.

Mr Kuchinad may be on to something. Mr Gallagher says the SEC wants change and will push hard to implement new measures if the industry does not step up.

"We must allocate resources within the commission to appropriately deal with the risks in the fixed income markets. It is time to address Liar's Poker."

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