Although one study suggests fewer than 10% of all bond trades take place online, there are more than 80 electronic trading platforms competing for the limited business.
And while all of them say they're faster, more efficient and provide greater liquidity, transparency and price discovery than traditional trading, they all have one thing in common: None is fully electronic.
At some point in the trading process, someone still has to fill out a piece of paper and manually enter data into a computer, usually when at clearing and settlement. The reason is that although Internet-based electronic trading systems have proliferated in the past year or so, there is no common protocol - or computer language - that can be recognized at the settlement end.
"There's still a lot of manual aspects to a trade involving, for instance, a Wall Street trading firm and an asset manager," said Joe Sack, senior vice president at the Bond Market Association, a Washington-based trade group. "It's a big business puzzle and no one has put all the pieces together yet."
But the Bond Market Association and bond dealers nationwide are trying. They have formed a group called the Online Bond Steering Committee to address fully automating the bond trading process.
Among the committee members are the heads of some of the top bond trading firms in the country. Craig Messinger, executive vice president of fixed income and sales for Fidelity Capital Markets, Boston, is the committee chairman. Other members include Gregory Carr, vice president at A.G. Edwards & Sons Inc., St. Louis; John Casaudoumecq, managing director at Salomon Smith Barney Holdings Inc., New York; and Murray Finebaum, chief executive officer of Trading Edge Inc. and soon-to-be vice chairman of Market Axess Inc., a New York-based online trading company that recently announced plans to acquire Trading Edge.
In February, Mr. Sack helped organize a conference of seven major online bond trading companies and three large buy-side firms. One panel discussed the importance of straight through trading, - fully electronic trading with next-day settlement - for buy-side firms.
Not so long ago, fierce competition would have prevented such a conference, Mr. Sack said. But now everyone recognizes the benefits of fully electronic trading.
"There's a new openness in the bond business as a result of e-commerce," Mr. Sack observed. "Because the technology itself is so open and available, there's no reason to hold back. Everyone has something to gain."
What online trading means for institutional investors is faster trades, more liquidity and better price discovery and transparency, said Richard McVey, Market Axess CEO.
What the online bond-trading companies stand to gain is a greater share of the expected increase in the volume of online bond trading. While most experts acknowledge that online trading today makes up less than 10% of the total volume of bonds traded, that number is expected to grow in the coming years, to 15% by 2002 and more than 20% by 2003, according to a December report from Boston-based research and consulting firm Celent Communications.
But first, online platforms will have to open the potential bottleneck of manual clearing and settlement.
In theory, online trading could generate enough volume to swamp the non-automated parts of the process. Even major online bond trading players like Market Axess recognize the manual part of the process as the weak link.
Which isn't to say that online bond trading today doesn't deliver on its promises for those who choose to use it. Mr. McVey said his site merging of bonds and research on a system that traders can access from their desks saves time and improves results. Electronic trading, even with its manual component, is light years ahead of the old method of buying or selling bonds, which involved a whirlwind of phone calls, note taking and discussions.
Mr. McVey said the barrier to a fully automated system is developing a common protocol that all platforms can share and all clearing and settlement houses can read, no matter where the data comes from.
"It's an issue of common protocol and indexing so clients and dealers can recognize one another," Mr. McVey said. "Right now every dealer has a different account number for the same client. There's a huge area of potential savings and reduced risk if we can get this right."
Market Axess is an Internet-based bond-trading company comprising a consortium of eight of the 12 biggest bond dealers on Wall Street. Together, these companies offer 3,000 line items and $10 billion in tradable bonds, Mr. McVey said.
Each company posts its aggregate bond content and research on the Market Axess site. To buy or sell a bond, users choose from those available or enter a cusip number, which generates an electronic ticket. The user then receives bids or offers.
Once an electronic match is made, the order is officially reviewed and recorded. Broker-dealers send out trade orders in bunches, usually at the end of the day, although some larger firms send out multiple bunches each day. Typically this settlement process is still manual, and is the greatest potential bottleneck when online trading volume increases as it's expected to.