Bond platforms look to bury archaic phone trading

When bond traders fancy lunch, they can order from a panoply of smartphone apps and get a burrito or pad thai delivered promptly to the desk. When they want to buy some corporate bonds, an archaic landline phone is still usually required. But that may soon be changing.

The downturn in bond trading volumes for issued debt - so acute that even regulators, central bankers and the International Monetary Fund are getting worried - has triggered a Cambrian explosion in the electronic bond trading ecosystem.

About a dozen start-ups have mushroomed over the past few years focusing primarily on modernising and improving the old-fashioned and anaemic corporate bond trading system, where the liquidity crisis is the deepest. The question, however, is whether technology can facilitate bond investors selling large amounts of paper without generating significant market turmoil.

Almost $24bn of corporate bonds trade daily so far in 2015, the highest on record according to Sifma data. But relative to the size of the swelling market - which has almost doubled since 2008 to nearly $8tn - the ability to wheel and deal has deteriorated. Traders say bigger chunks of corporate bonds worth $5m or more are particularly difficult to shift, as banks are increasingly unwilling to act as market-makers due to financial and regulatory pressures.

Two start-ups launched last week in an effort to fix this problem, with TruMid and Electronifie each offering very different approaches and solutions to the corporate bond trading conundrum.

TruMid is arguably one of the most high-profile new entrants into the electronic trading industry, thanks to a slew of eye-catching, senior hires from Wall Street's bond trading desks.

"There's near-universal acceptance that the way things work in credit markets is broken," says Michael Sobel, poached by TruMid from Barclays' junk bond trading desk last year. "You don't buy tickets to a sporting event by picking up the phone any more, but corporate bonds are still bought that way. If the market was still functioning efficiently, this antiquated system would persist, but for most participants it just isn't working any more."

TruMid's solution to the liquidity crunch is a series of bond trading sessions on its platform, or "swarms", as the company calls them.

Each swarm will eventually include just 51 bonds in a mix of investment grade, junk and distressed debt. One-third of the swarms will be sector-based, say, telecoms bonds at 2pm on Thursdays; one-third will be topical, with the securities picked out by TruMid's traders; and the last third will be dedicated to bonds nominated by clients.

"There are so many ships sailing past each other in the night, and TruMid's swarms can help them find each other," says Mr Sobel. "Our sessions funnel people's attention and liquidity, and focus it at a particular time."

Electronifie also focused on improving the liquidity for bigger corporate bond trades. But it is taking a different tack. Founded by Amar Kuchinad, a former Goldman Sachs trader and Securities and Exchange Commission adviser, Electronifie has enticed big banks to provide continuous, firm quotes on about 1,300 bonds through a revenue sharing agreement, but provides the anonymity that many big asset managers crave.

"We think dealers are an integral part of the market and we wanted them to provide their expertise on pricing without having to commit capital for block-sized liquidity," Mr Kuchinad says.

Many bank traders are sceptical of the new platforms. They argue that the fundamental issues sucking the life from corporate bond markets are too big and too complex to be meaningfully ameliorated by improvements to the market's electronic infrastructure.

"They're coming up with science projects and seeing what works," says one corporate bond trader.

Moreover, both TruMid and Electronifie have to contend with a clutch of new competitors and a handful of big incumbents. MarketAxess, TradeWeb and Bloomberg reign in the government bond market, and have established platforms, big networks of clients and significant resources to throw at the corporate debt problem.

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TruMid and Electronifie declined to give early numbers on their first handful of trading sessions, but say the initial signs have been promising. "We're very pleased on how the first few days have gone," says Ravi Singh, president of TruMid, while Mr Kuchinad says: "We have had an encouraging amount of activity from dealers and subscribers."

While bank traders are naturally cynical about the potential, wary of their traditional bond market hegemony being eroded, investors are more hopeful that new entrants like Electronifie and TruMid will eventually help invigorate corporate bond market trading.

Jim Switzer, head of credit trading at AllianceBernstein, says the asset manager has tested out both new platforms since their launches last week and so far TruMid appears to be somewhat further ahead of its rival.

"But it's a long road, and there are a lot of hurdles to overcome and behaviour to change," he says. "I think both have got a shot."

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