The recent launch by eight large U.S. money managers of an equity dark pool has some wondering if something similar could be built by the buy side for fixed-income trading.
The concerns that helped form U.S.-based Luminex Analytics & Trading LLC along with another manager-owned venue, Europe-based Plato Partnership Ltd. — best execution in block trades and transparency for its participants — are also crucial issues in fixed-income trading, analysts said, which makes it logical that a buy-side fixed-income trading venue could serve those needs.
Jamie Selway, New York-based managing director and head of electronic brokerage at Investment Technology Group Inc., said he thinks it could be done. “I don't see why not. ... Look at Project Plato; that deals with multiassets. The managers who've gotten together on Luminex have indicated that they could do other things besides equities.
“The buy side is comfortable acting like a liquidity provider with equities but not in bonds,” Mr. Selway said. “They rely on the traditional sell side for that. But the buy side is joining with others who say it's time to change and become a price maker, so they need to map into the trading process. They're saying more and more, "Why do I need to go to a Goldman Sachs or Morgan Stanley to get anything done?'”
Managers involved in the creation of Luminex — Fidelity Investments, Bank of New York Mellon Corp., BlackRock Inc., The Capital Group Cos. Inc., Invesco Ltd., J.P. Morgan Asset Management, MFS Investment Management, State Street Global Advisors and T. Rowe Price Group Inc. — have talked about a fixed-income venue.
“We'll need to see if we get the equity parts of Luminex right,” said Kevin Cronin, managing director, global head of trading, at Invesco Ltd., Atlanta. “If we do, then we might do fixed income. Discussions are going on as fixed-income market structure changes. Something conducive to block trading is always going to be looked at.
“We're open-minded about this,” Mr. Cronin added, “but our primary focus is on getting U.S. equities right. If we do and are ready to expand, I think we'd consider fixed income. We don't want to be exchange operators, but if Luminex exerts pressure on other market operators to act responsibly, that's a good thing.”
The devil, said Mr. Selway, is in the details.
“It certainly won't be as easy as with equities,” he said. “Look, equity crossing is hard, but boy oh boy, fixed-income crossing is much, much harder. All sorts of companies are trying to come up with ways to do it: us at ITG, Liquidnet, Tradeweb, MarketAxess, OpenBondX. If bond crossing can be proven out and the new entrants can change the way bond trading works, then something like a Luminex could work.”
“It's a long shot,” said Anthony J. Perrotta Jr., principal and head of fixed-income research at TABB Group Inc., New York. “Theoretically, there's nothing prohibiting the buy side from putting together a network to efficiently transfer risk given that they're the predominant asset managers. But in practical terms, it'd be almost impossible to do.”