Tag Archives: market fragmentation

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Fintech, Fixed Income Trading & Fragmentation-Now a Private Placement Bond Platform

Fintech Fixed Income Trading & Fragmentation-What’s Next? A Venue for Private Placement Bonds & MTNs

Despite the seeming oversupply of electronic bond trading initiatives, the convergence of fintech and fixed income trading continues to spawn new electronic trading start-ups, bringing the total industry count to 128 venues.  The latest player, dubbed “Origin Markets”, aims at filling a void in the $1.5 trillion Medium-Term Note space aka private placement bond market. The “still-in-beta mode” initiative is based in the UK and backed by a consortium of global banks led by BNP Paribas, Bank of America Merrill Lynch, Societe Generale and Credit Suisse.

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Raja Palaniappan CEO Origin Markets

Origin’s founder and quarterback is Raja Palaniappan, a former Credit Suisse flow trader and MIT wonk who cut his teeth trading MTNs at various firms during the past 9 years and was most recently a VP responsible for making markets in investment grade and crossover corporate bonds and CDS at Credit Suisse.

A spokesperson for UK-based Origin said its platform “simplifies issuance in the medium-term note private placement market by acting as a central information source.” The business model allows dealers to receive targeted funding levels from issuers on a single platform and allows users to foster new relationships through cloud-based technology and bank-grade security.

“[Issuers] can optimise their funding using the built-in cross-currency pricer, comparing their funding levels to their own and their peers’ levels in the secondary markets,” Origin said.

Joakim Holmstrom, head of funding at Municipality Finance, explained the platform makes the medium term note process more efficient and provides access to a broader pool of dealers. Ben Powell, head of funding for IFC, added that Origin’s platform “simplifies what was once a manual process prone to inefficiency. It allows us to manage our dealer communication in one central place.”

The platform’s full launch is expected later this year and brings the total number of electronic fixed income platforms to 128, according to a recent compilation of platforms by front office trading consultant John Greenan.

Bob Mahdavi, the CTO for private placement bond documentation firm Prospectus.com stated “The MTN market is indisputably one of the largest sectors in terms of number of issues, yet it is populated by thousands of private issues that don’t typically lend themselves to being traded in an electronic venue.” Added Mahdavi, whose firm works with tens of dozens of Issuers, as well as attorneys and boutique investment banks throughout Europe and Asia in preparing debt offering documents, “You can build it, but will they come?”

According to fintech merchant bankers at SenaHill Partners “When considering the still nascent stage impact of electronic venues focused public company investment grade corporate bonds, including the likes of startup Electronifie among others, a platform that can prove truly effective and liquid for MTNs can prove to be a big challenge, albeit the backing of big banks does provide some wind in the sail.”

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As noted in a 11 Jan story in TheTradeNews and citing the work of Greenan, between November 2016 and January this year alone, 14 new fixed income trading platforms joined the market.

“…The asset class is overcrowded with trading venues as regulation forces the structure of fixed income across instruments away from a centralised model – mostly due to bank balance sheet constraints – towards a decentralised model….Market participants have said the explosion of venues is causing fragmentation and a ‘liquidity drought’ in global bond markets.”

Large buy-side firms and asset managers have the opportunity to act as price makers rather than price takers, according to a quarterly report published by the International Capital Market Association (ICMA) this week.

The report said the bond market has seen a decrease in ratio turnover, despite an increase in market size and overall turnover against a backdrop of bond issuance, as issuers take advantage of low interest rates globally.

Joanna Cound, head of public policy EMEA at Blackrock and a member of the ICMA board, explained this has led to liquidity in fixed income markets suffering, something regulators have taken a greater interest in over the last year.

Fixed income participants are wary the bond market has not improved significantly since the financial crisis, as future stress events could have far-reaching consequences.

To continue reading TheTradeNews story click here

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NYSE Snafu Causes Market Structure Experts to Flip-Flop

MarketsMuse senior editors have quickly canvassed a broad assortment of “market structure experts” and industry talking heads who have been at the forefront of debating the pros and cons of market electronification, multiple market centers and the underlying issue: “Is Market Fragmentation Good, Bad or Ugly?”

For those who might have just landed on Planet Earth, the debate (which is ongoing via industry outlets such as TabbForum, MarketsMedia, and most others) boils down to whether multiple, competing electronic exchange systems enhance overall market liquidity and make it ‘easier and better’ for institutions and retail investors to execute ‘anywhere/anytime’ via the now nearly two dozen “ECNs”, “Dark Pools” that offer a Chinese menu of rebates, kickbacks and assorted maker-taker fee schemes (e.g. ARCA, BATS etc), or whether someone should try to shove the Genie back into the bottle and revert to the days of yore when the NYSE was the dominant listing and trading center for top company shares, and complemented by a select, handful of regional stock exchanges, most notably, The MidWest Stock Exchange, The American Stock Exchange, The Philadelphia Stock and the Cincinnati Stock Exchange.

Despite the fact that CNBC talking heads dedicated the entire day’s coverage to the NYSE snafu with rampant speculation as to whether the day’s outage was due to a cyber attack by the Chinese in their effort to distract the world from the dramatic drop in China-listed shares, whether it was a Russia-based malware attack, or perhaps even an ISIS-born cyber-terrorist attack that also impacted United Airlines)–the fact of the matter (one that CNBC seemed oblivious to) is that those who wanted to execute stock trades through their brokers were able to do so without disruption, simply because those brokers routed orders to a drop down menu of exchanges that compete with the NYSE..

Yes, the NYSE lost a day’s worth of fees attached to every order they typically execute on a normal day (not a good day for exchange President Tom Farley)–but more than half of the market structure experts who have continued to campaign against market fragmentation have [temporarily] flip-flopped today and have acknowledged that were it not for multiple competing exchanges, today would have been a real headache for US stock market investors and brokers. No doubt CNBC and others who were fixated on this outage will be able to turn their attention back to what is taking place in Greece, China and other topics that actually do impact the price of global equities.

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Fixed Income FinTech Chapter 14: More e-Trading Platforms for US Govt Bonds

The US Government Bond Market is set to explode…with more e-trading systems.. MarketsMuse Tech Talk continues its curating of fintech stories from the world of fixed income and today’s update is courtesy of WSJ’s Katy Burne, who does a superb job (as always) in summarizing the latest assortment of US Government bond “e-trading” initiatives. MarketsMuse editor note: The financial marketplace is now littered with electronic trading platforms ostensibly designed to enhance liquidity and address the needs of respective market participants.

The once-revered premise of electronifying old-fashioned, non-transparent OTC markets so as to make them fully transparent and in turn, enhance liquidity in a manner that would inspire institutional investors to increase use of those products has, according to many, morphed into a ethernet rat’s nest. There are now almost as many of flavors of institutional electronic trading platforms as there are ice cream flavors from by Ben & Jerry’s and Baskin Robbins combined. Most if not all are ‘accelerated’ thanks to the innovation of rebate schemes, payment for order flow menus, and of course, high-frequency trading (HFT) applications, which has made the market structure more akin to a continuous “Battle of the Transformers.”

Despite the rising concern  on the part of both institutional investors and regulators as to the impact of market fragmentation (the latter of whom are easily-cajoled by the phalanx of lobbyists and special interest groups),  the Genie is not only out of the bottle, it’s reach continues…and the US Govt bond market is, according to those leading the initiatives described below, ripe for ‘innovation,’  for two good reasons. The first is the widely-shared belief that the rates market, which has been mostly range bound for several years thanks to the assortment of QE programs and lackluster economic recovery. is now anticipating a major uptick in volatility, which is a trader’s favorite friend. Secondly, the role of major investment bank trading desks, once ‘controlled’ the market for government bonds, has become severely diminished consequent to Dodd-Frank and the regulatory regime governing those banks and the financial markets at large.

Here’s the opening excerpt from Katy Burne’s column “Antiquated Treasury Trade Draws Upstarts”..

A host of companies are vying to set up new electronic networks for trading U.S. Treasurys, the latest upheaval in a $12.5 trillion market already being reshaped by some large banks’ pullback and the growth of fast-trading firms.

The efforts highlight the shifting role of banks, and gyrations in the market as the Federal Reserve prepares to lift interest rates in the months ahead.

Traditional Treasury trading is now widely viewed as “antiquated and rigid,” said David Light, a former head of government-bond sales at Citigroup and co-founder of CrossRate Technologies LLC, which is launching one of the new venues. “It simply did not evolve with all the changes in technology and regulation.”

Currently, there are two main channels for trading Treasurys on screens. Banks trade opposite their asset manager and hedge fund clients, with identities disclosed, via either Bloomberg LP or Tradeweb Markets LLC.

The banks then trade with other banks and professional investors anonymously, in exchange-like systems on either BrokerTec, owned by broker ICAP PLC, or eSpeed, owned by Nasdaq OMX Group. The banks trade with other banks in a wholesale market on one set of prices; they trade with customers on another set of prices. Continue reading

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Best Execution Algos for Options Trading: Dash Dares To Be Different

MarketsMuse.com Strike Price section profiles trading systems vendor Dash Financial algorithm-based approach to securing options market “best execution” in the ever-increasing world of options mart fragmentation and the wacky rebate schemes that have proliferated across the electronic options exchange landscape. Below is courtesy of extracted elements from MarketsMedia.com April 20 story “Parsing ‘Best Ex’ for Options Trades”

Achieving best execution in options trading can be far more complex than in equities because of exchanges’ multi-tiered pricing models, which results in hidden transaction fees that may negate the economics of a trade.

That’s according to David Karat, head of sales and marketing at algorithmic trading-technology company Dash Financial.

The equities world is complicated only by fragmentation, because the pricing schedule is based on whether one trades either as principal or agent, Karat explained. “You can go to an exchange and know what price tier your broker is at,” he said. “You know what the maker-taker fees or the rebates are.”

In options, pricing is dependent on a wider range of factors. Orders must be tagged whether they’re a customer, professional customer, broker/dealer or market maker. “All those capacities have different nuances, even the schedules for pricing,” Karat said. “It’s even got down to the point where you’ll have some basket of symbols that, based on certain criteria, if you traded it in a certain time, it will have a different rate structure.”

Dash Financial launched in 2011 to provide technology that would enable traders to gain a greater level of transparency into their orders. “The idea behind Dash was to build a firm that was completely transparent to the client using ‘best-of-breed’ technology and show the client everything that we did all the time,” Karat said. “We have a dashboard that shows every aspect of the routing as it’s happening. As the order trades, they’re seeing where we’re routing it, why we’re routing it that way and everything else.”

Dash Financial has launched Blitz, a trading algorithm focused on aggressive liquidity capture. One of the biggest issues facing the marketplace today is institutional traders’ inability to clear the screens as displayed on order arrival.

To continue reading the entire story from MarketsMedia.com, please click here