CHICAGO -- Electronics again are poised to take a chunk of market share from the brokerage industry, this time in the fixed-income markets.
With electronic trading becoming a dominant force in global futures markets and a growing force in equities, the relatively secretive world of fixed-income trading is ripe for the picking by electronic brokers.
The newest electronic bond trading system is Chicago Board Brokerage LLC's MarketPower, which is set to begin trading July 13.
CBB, a joint effort of the Chicago Board of Trade and Prebon Yamane, is part of a wave of institutions offering electronic trading of fixed-income securities.
Other systems already in operation include TradeWeb, BondNet and Autobahn.
And a new electronic bond exchange, Integrated Bond Exchange Inc., is being formed and is targeted to begin trading late this year or early next year.
Part of the reason electronic trading is growing is that transparency is lacking in the bond market compared with stocks and futures markets.
"Cash bond trading is probably the least transparent market that we trade," said Robert Prince, director of research and trading for Bridgewater Associates Inc., a Wilton, Conn.-based money manager that is active in a number of markets worldwide.
"You don't really know what the market really is when you call a cash bond dealer," he said.
That's because bond dealers have interdealer brokers that set the true price for bond securities. Money managers don't have access to those interdealer brokers, which are effectively setting bond prices.
AHEAD OF THE REGULATORS
Moreover, the prices money managers see include markups over what primary dealers pay.
Although there have been rumblings of possible legislation to improve transparency in the bond market, investors might be beating legislators to the punch. The number of electronic systems that improve bond pricing transparency is growing, and get a thumbs-up from many institutional investors.
"I don't think there's anything that's going to stop" electronic bond trading from grabbing a bigger share of the market, said James Keller, portfolio manager for Pacific Investment Management Co., Newport Beach, Calif.
CBB recently got approval to give customers of CBOT members direct access to the trading system, said Ann Gorski, managing director in sales and marketing for CBB.
While CBB's MarketPower was designed initially for CBOT members that wanted to trade futures and cash bonds at the same time -- called basis trading -- CBB executives asked for and got permission to allow the customers of CBOT members to use it as well, Ms. Gorski said.
The biggest advantage CBB's design offers over its competitors is that link to the CBOT, PIMCO's Mr. Keller said.
"They've got a reasonable chance of surviving," he said.
Moreover, he said, CBB, with its strong clearing operation, potentially would be useful for trading over-the-counter derivatives such as interest rate options.
While initially focused on U.S. Treasury securities, Ms. Gorski said, CBB certainly would be able to handle other types of securities, including futures contracts. Moreover, she said, CBB officials are in talks with CBOT and Deutsche Terminb"rse officials about linking CBB to their respective electronic futures platforms.
Other existing electronic bond trading systems are being used, or tested for use, by institutional investors.
TradeWeb, a joint effort of five bond dealers -- Credit Suisse First Boston Corp., Goldman Sachs & Co., Lehman Brothers, Merrill Lynch & Co. and Salomon Smith Barney Inc. -- effectively replicates the existing trading setup with electronics.
Instead of calling five dealers on the phone looking for quotes on a trade, TradeWeb users reach them simultaneously over computers, getting real quotes and, theoretically, doing trades.
James Toffey, president of TradeWeb, said the system is doing about $1 billion worth of trades a day.
Another system, BondNet, a service of the Bank of New York, New York, gets positive early reviews from portfolio managers at ABN AMRO Asset Management (USA) Inc., Chicago.
Greg Boal, senior vice president and director of fixed income, said ABN AMRO managers were impressed with the prospects for BondNet, but don't expect to try to use it on a regular basis until the second half of this year.
Mr. Boal is upbeat on the prospects for electronic trading, in general. If liquidity grows big enough in the electronic systems, it could lead to a change in the way the entire market operates, he said.
Cash traders might have to adopt electronic methods, he said.
Harris Investment Management Inc., Chicago, selectively uses an electronic system, Autobahn, a service of Deutsche Bank Securities Inc., New York.
"We trade electronically. I think there is a place for it," said Mark Newlin, senior partner and head of fixed income for Harris.
Harris uses the Autobahn system not only to trade, but also as a benchmark for pricing, he said. Firm officials decided the cost of paying for a screen to get price quotes from the interdealer market wasn't worth it, Mr. Newlin said.
Autobahn offers them trading access and pricing, he said.
Conversely, Mr. Newlin said, the firm will use electronics only selectively because its executives believe Wall Street bond dealers are a good source of trading ideas.
"We want to protect our good brokerage coverage," he said. "I would be somewhat concerned if a large part of our (trading) went to the screens."
Similarly, Jess Yawitz, chief executive of NISA Investment Advisors LLC, St. Louis, said he prefers the existing system over electronics.
"We try to cultivate a good relationship with the street," he said.
Mr. Yawitz, who admits to being a computer illiterate, said better investment decisions are made through personal interactions with market participants.
Just like a pension plan sponsor wouldn't likely hire an external manager based on a resume and performance record posted on the Internet, he would rather deal directly with the other side of a trade.
Larry Fondren, president and chief executive of the Integrated Bond Exchange -- and former head of the now-defunct electronic system called Intervest -- said close to 200 firms have signed on as members of IBEX.
Invitations will soon be going out to attract even more members, he said.
Mr. Fondren said IBEX will work like other exchanges, being self-regulated with oversight from the Securities and Exchange Commission.