Bonds are known to be the most effective remedy for
financial risks of the global economy. They serve as
the funding source for governments and thus act as catalysts
for a well-balanced economic environment. In addition
to this, the introduction of electronic trading systems
in bond trading has brought the US bond market from
a so-called ''neglected'' state to that of becoming the
''hottest'' topic on Wall Street.
Group, a research firm in Needham, Massachusetts, predicted
in a recent report that 68 per cent of all bond transactions
will be electronic by 2005, up from 33 per cent in 2001.
Similarly, another recent survey by the Bond Market
Association (TBMA) estimates that trade volumes have
grown an average of 70 per cent, with individual rates
ranging from 20-140 per cent.
Online trading in the bond market flagged off around
six years ago in 1997. During the three initial years
(from 1997 to 2000), the market witnessed a huge proliferation
in electronic bond trading platforms. Participants rushed
to take advantage of the lucrative market opportunities
and the ostensibly unlimited access to funding.
move reached its zenith during 2001 with the list of
electronic trading platforms reaching almost 90
up from 11, 27, 40 and 80 in 1997, 1998, 1999 and 2000,
respectively. If we include financial institutions''
own websites, the number touches more than 300.
Source: Celent Communications
ease and comfort of dealing with e-bonds totally changed
the nature of the fixed income market. Customers who
were reluctant to invest in bonds for fear that they
would not be able to sell them easily at a reasonable
price started finding bonds more attractive.
we analyse the driving force behind this trend, we find
that there are five factors that contributed towards
the success of electronic bond trading. These factors
or other traditional methods used for bond trading earlier
dissuaded many customers from investing. Online bond
trading became more interesting as it saved time, reduced
human errors and became more secured.
even smaller firms got a chance to take part in the
race, which was earlier, only available to the larger
ones thanks to the advent of the Internet. Technology
in bond trading created a homogenous platform for all
firms irrespective of their sizes, doing away with a
trend, which was once dominated only by a handful of
big players. The other visible change was the unsettling
of institutional stock trade, collapsing brokers'' commission
fees in a general realignment of market dynamics.
mushrooming of more and more players was helpful for
investors. Newer features like connectivity for automated
trade processing, pre-trade services such as research,
analytics and services tailored to syndicated underwriting
of new issues, were added to lure online investors.
But, as the old adage goes, ''Too many cooks spoil the
broth,'' the online bond market also met with a similar
report published by Celent Communications during August
2002 said 2001 was a very tough year for the once high-flying
e-bond trading platforms. The hype surrounding the enormous
potential of electronic fixed income trading platforms
was replaced by pessimism as many wondered: "Who
will fold next?"
the market passed through a rapid-growth phase during
the first four years, it reached a saturation level
during the last two years. There was an increase of
only one trading platform in 2002 at 81 from 80 in 2001.
Experts have estimated that the cost of developing,
staffing, marketing and launching an electronic trading
platform cost a player around $50-100 million.
systems range from online auction systems, cross-matching
systems, inter-dealer platforms, multi-dealer systems
and other trading systems that cover almost the whole
financial market ranging from US Treasury bills and
European government bonds to corporate and municipal
recent TBMA survey of electronic transaction systems
for fixed-income securities found only 77 electronic
fixed-income trading systems are currently operating
in the US and Europe, versus 81 in 2002. Of the 77,
46 are based principally in the US and 31 are in Europe.
has been noticed that compared to others, multi-dealer
systems are the most difficult to manage due to the
conflict of interests among multiple numbers of founding
members. Disagreements in governing decisions such as
the selection of bank members, oversight committee,
strategies, and rules and regulations lead to poor customer
service. On the other hand, the cross-matching systems
saw a rapid growth with their numbers tripling during
founders of the electronic trading systems must be also
careful in selecting a software vendor for designing
and developing an online bond trading system. It is
very important to select a vendor with the right mix
of expertise in the technology area as well as the domain.
This right blend of expertise will help them to make
the right decisions in moving forward during all phases
of design and development," says Mark Engelhardt,
director (business development), Pinnacle Systems, a
US-based technology consulting and solutions provider
to capital markets firms.
the boom, came the lull. Too many new players affected
the trading as activities fractured into fragments lacking
coherence, which made it difficult to generate sufficient
liquidity and revenue. Industry reports said that growth
slowed in the treasuries sector, which was once considered
to be the most liquid and standardised product market.
Whereas mortgage-backed, agency and municipal markets
achieved the highest growth.
the market moved towards a matured and consolidated
phase. Vendors learned the tips for survival in the
market and began adding newer features to their trading
systems. Thus only a core group of players came into
In April 2003, FIX Protocol Ltd, in association with
TBMA, published version 4.4 of the Financial Information
eXchange (FIX) Protocol. The FIX Protocol is a language
defining specific kinds of electronic messages for communicating
securities transactions between two parties.
is continuing to push for the adoption of FIX version
4.4 because of cost-reduction. When FIX is adopted,
it will make using the systems much easier. It has cost-reduction
benefits as well with respect to trade processing,"
says Michael Decker, senior vice-president, TBMA.
industry has also initiated the development of a common
message hub for the fixed-income market, a ''market data
definition language'' for bond descriptions and standards
for operational aspects of prime brokerage services
for smooth electronic trade execution.
FIX factor made its entry into the market during 1993.
Now, it has spread its arms from cash equity to fixed
income and credit derivatives. The FIX protocol is poised
to become the preferred messaging format for inter-firm
communications in capital markets with attractive attributes
industry is speculating the entry of FIX as a positive
move towards the realisation of straight-through processing
(STP) by the fixed income market. However, according
to Kevin Houston, chairman of the European FIX Protocol
Technical Committee, FIX is more than just an STP engine.
"It''s also a way to automate all pre- and post-trade
processes. It enables the communication of large numbers
of orders with exceptional accuracy, supporting different
types of trades, reducing errors throughout the process,
and allowing more timely access to the markets."
The online bond market seems to have witnessed a positive
trend during its six-year journey till date. From humble
beginnings with 11 electronic trading platforms, the
number exploded to a high of 90 in 2001. But a recent
survey by TBMA illustrated the exit of five players
from the trading fray as compared to last year. In a
way, it has been beneficial for customers because only
the principal and the best ones managed to stay aboard,
while the weaker ones sank.
TBMA report has rightly estimated that fixed income
trading will continue in 2004. Trading volume will continue
at its own pace, platform vendors will continue their
effort to bring in more and more enhancements to their
product offerings. There may also be a trend towards
mergers among trading platforms in the coming years.
Ultimately, in this whole scenario, the real winners
are the aspiring customers.