More managers using electronic trading platforms

Taking a cue from their equity cousins, institutional fixed-income portfolio managers and traders are increasingly turning to electronic trading platforms to buy and sell bonds, in an effort to increase efficiency on simpler trades and spend time on more difficult trades.

"We are heavy users across the board," said Mike Wands, director of fixed income for North America at State Street Global Advisors, Boston, which has more than $550 billion in fixed-income assets under management globally. He said the firm trades all types of bonds electronically — corporates, government and agency bonds, and mortgage-backed securities.

Close to 75% of corporates, 90% of governments and about 50% of mortgage bonds are traded electronically, he said. "We're very pleased with the ease of use as well as the (price) levels that we get."

SSgA might not be typical: Some industry players estimate only 9% of average daily corporate bond trading is done electronically. Still, electronic bond trading is becoming more common.

At ING Investment Management, Atlanta-based portfolio manager Chris Daniel said about 5% of the firm's corporate bond and Treasury trading is done electronically.

Electronic platforms "make trading a much more efficient process," he said.

Added David Vuchinich, senior portfolio manager at ING: "It's a pretty substantial information tool because you're able to see where a bond traded and where the inventory is, which makes the OTC nature of the market a lot easier to deal with."

Messrs. Vuchinich and Daniel run $28 billion to $30 billion in fixed income.

Mr. Vuchinich said the electronic trading systems allow him to handle a large number of small-lot trades in a short period of time, giving him the time to work larger, more difficult orders.

"It gives us the ability to put out 50 different offerings or bids wanted on $1 million or $2 million positions, like when we need to rebalance" a portfolio, he explained.

Sang Lee, managing partner of consulting firm Aite Group LLC, Boston, said he expects more than 60% of bond trading to be done electronically by 2008, compared with 35% in 2004 and just 2.6% at the end of 1998.

After a year of major activity in the electronic bond trading industry in 2004, this year is shaping up to be a defining one, not only for the trading firms, but also for the institutions that use them, particularly as competition heats up, Mr. Lee said.

Last year, the two big players that provide electronic trading services to institutional investors — TradeWeb LLC, Jersey City, N.J., and MarketAxess Holdings Inc., New York — underwent major changes. First, TradeWeb was acquired by Thomson Financial, a unit of Stamford, Conn.-based Thomson Corp., for $385 million to create Thomson TradeWeb. Then, MarketAxess completed an initial public offering.

Thomson TradeWeb's average daily trade volume is about $148 billion; Market Axess', $1.2 billion.

Thomson TradeWeb made its mark in the U.S. Treasury market and MarketAxess in the corporate bond sector, but both have been seeking to move into each other's key market as well as other areas. Thomson TradeWeb provides a platform to trade just about every type of fixed-income security except municipal bonds, while MarketAxess is expanding into some derivative fixed-income products like a trading platform for credit default swap indexes.

At Thomson TradeWeb, requests to interview James W. Toffey, chief executive officer, were ignored. But Rick McVey, chairman and CEO of MarketAxess, talked at length about the evolution of electronic fixed-income trading.

"The credit derivatives market is booming and as a result, the liquidity and turnover in credit default swaps is growing rapidly," Mr. McVey said.

"Index trading is making it very easy for investment managers to get exposure to a broad basket of credits through the CDS market, and the transaction costs are lower than if you were to try to create it through the corporate bond market," he said.

Institutional investors also can trade over single-dealer systems built by the dealers themselves. And Aite Group's Mr. Lee said some of those single-dealer systems have linked with multidealer platforms to offer greater selection to institutions.

"A lot of buy-side firms are looking for a wider net," Mr. Lee said, explaining that single-dealer platforms usually offer only the bank's own fixed-income inventory.

Multidealer platforms such as Thomson TradeWeb and MarketAxess have around 31% of the overall market for electronic bond trading, with single-dealer platforms capturing less than 12%, according to data from Aite Group. Interdealer platforms — where banks trade with no buy-side involvement — handle the rest.

"In the institutional market, almost all electronic trading is taking place on multidealer platforms," Mr. McVey noted.

At DuPont Capital Management, Wilmington, Del., Kris Kowal, managing director of global fixed income, uses MarketAxess to trade emerging market debt, but in the corporate bond market, he uses it only to find prices.

"We tried to do one or two (corporate bond) trades and were not successful," Mr. Kowal said. "It was related to liquidity."

Beyond liquidity, technology is important to provide customers with accurate pricing data, analytics and trade data, he added.

With institutional investors "beyond the novelty of electronic execution," electronic trading platforms have built technology to include middle- and back-office services such as trade settlement, Mr. Lee explained.

Still, some market participants do not see those added services as critical.

At SSgA, Mr. Wands said having straight-through processing is helpful but not crucial. "We consider this an added bonus," he said.

In any case, competition for buy-side clients is expected to remain hot, even as the market itself grows.

"Electronic trading continues to grow, both in the percentage of institutional participants as well as in the market share that's being traded," Mr. McVey said. "The pie is getting bigger and the share is getting bigger."

That could be a boon to institutional investors because competition could force costs down.

"Fees are starting to become an issue as competing products are being developed," Mr. Wands said.

"It's possible that a dominant provider, like TradeWeb or MarketAxess, for example, could lose market share to other low-fee or no-fee providers."