Twenty-one electronic platforms for trading fixed-income securities disappeared in 2001, and more are expected to go away this year.
Like many dot-coms, electronic bond trading platforms suffered when cash from venture capitalists and other private investors dried up. Others found their business models did not fit the needs of investors. And with so many entrants, liquidity did not come easily.
"There were too many systems announced in development," said Michael Decker, a senior vice president at the Bond Market Association, a Washington-based organization that represents bond traders and tracks players in the industry.
As a result, less successful platforms put themselves up for sale. Some, such as BondClick Ltd., BondLink and BondNexus Corp., found buyers. Others, including BondMart Technologies Inc., BondBook, eBondUSA.com, Muniversal.com, MBSAuction.com and Integrated Bond Exchange Inc., had to close their doors.
Traditionally, bond traders have placed telephone orders with brokers. In Mr. Decker's view, some electronic platforms made the mistake of trying to change investors' trading practices to anonymous systems similar to equities exchanges. He said fixed-income investors weren't willing to support that business model. "Certain approaches to electronic trading didn't catch on with investors," said Mr. Decker.
"It was a huge behavioral and structural change ... the market was not ready to support that change," said John Kim, the former chief executive officer of BondBook. The company's business model was to have investors trade corporate bonds in an anonymous environment. Mr. Kim said the idea was too far ahead of its time to be successful. The New York-based platform closed in October, just seven months after opening.
"We had very common problems," said Mr. Kim, who has had conversations with executives from other unprofitable platforms. In addition to an untested business model, he said trading volume shrank following the Sept. 11 terrorist attacks, which forced BondBook from its location across the street from the World Trade Center.
Also contributing to BondBook's failure was the loss of funding and the inability to find a buyer for the platform within the two- to three-month timeframe BondBook determined it had to find a buyer, said Mr. Kim. In the long run, he added, the competitor BondBook could not beat was the established format for trading corporate bonds.
In January, Mr. Kim started as president of retirement investment systems for CIGNA Retirement & Investment Services, Boston.
Easier and faster
Electronic trading promised to make the process of trading bonds easier and faster. However, some investors found electronic bond trading platforms more time-consuming, said Andy Nybo, a senior analyst at technology consulting and research firm TowerGroup, Needham, Mass. He did not name any specific platforms.
The problem with online bond trading is the complexity, said David Csiki, managing director of software provider INDATA, San Diego. He pointed out that equity trades are rather simple because buy-side firms only need to specify which stock they want to buy, along with the price and the quantity. However, fixed-income traders need analytics to research each bond they buy and verification that each bond will comply with portfolio guidelines, which is now done mostly by phone calls with brokers, said Mr. Csiki.
Messrs. Nybo and Decker agreed that fixed-income securities transactions are more complicated than equities transactions. Mr. Decker noted that fixed-income securities such as high yield, corporates and collateralized mortgage obligations have a "labor-intensive" trading process.
Jerry Putnam, chief executive officer of Chicago-based electronic communications network Archipelago LLC, which is establishing its own online domestic equities exchange, said he would tackle options, futures and international equities before trading bonds, citing their complexity and a lack of familiarity with the marketplace as reasons.
At one time, more than 100 electronic bond-trading platforms were in operation.
"Any time someone said they had a great idea for trading bonds ... there were plenty of investors," said Mr. Nybo.
In 1999 and 2000, Mr. Decker said, it seemed as if new platforms were being added weekly, and not enough planning had gone into them.
The successful bond trading platforms have not attempted to alter the process of trading bonds, said Mr. Decker. The companies he sees as being successful are TradeWeb LLC, Market Axess, Bloomberg Bond Trader and EuroMOT. He also praised interdealer eSpeed Inc., New York for its success in attracting and retaining clientele.
"We're not a one-trick pony," said Lee Amaites, eSpeed's London-based global chief operating officer.
Mr. Amaites' firm was the offspring of New York-based brokerage firm Cantor Fitzgerald LP. Cantor Fitzgerald's 30-plus years of experience as a brokerage firm played a large part in its success online, he said.
"Name recognition was clearly in our favor," he added.
eSpeed first traded U.S. Treasuries in 1999 and quickly moved into energy, corporates, agencies, swaps and international bonds.
Countering the comments of Messrs. Nybo and Decker, Mr. Amaites said any security that can be traded in a traditional format can be traded online. He pointed out that eSpeed concentrated on making its online trading format as similar as possible to telephone trading.
"The difficult part was the transition," said Mr. Amaites.
Messrs. Nybo, Kim and Decker said they expect more consolidation to take place in 2002, as they saidthe marketplace cannot support the current 79 platforms in the United States and Europe.