In May and June The Banker asked trading desks at leading banks, investment firms, insurance companies and other financial institutions to rate the electronic trading systems that they use to trade fixed income securities. Traders were asked to rate each system out of 10 for the following: overall ease of use and site design; access to research; liquidity; breadth of debt products traded; access to new issues; access to a wide range of market makers and underwriters; neutrality and independence of management; competitive and transparent multiple-price discovery; speed of response and efficiency of execution; efficient straight through processing and back office settlement; ability to transact a full range of deals at any size: the reliability of website; and the overall quality of service.
In total, 40 institutions responded to the poll and a total of 109 opinions on individual trading systems were given. Systems that were rated by less than three traders were not included. The results are not weighted to take account of the number of ratings they received from traders. The final results published represent the average scores given by traders for each category. The overall ranking is based on the average scores across all criteria.
In the past three years, the number of electronic trading systems covering the bond markets has mushroomed from around 12 to more than 80. If you include financial institutions' own websites, the number rises to more than 300. But the verdict on which systems will eventually dominate the expanding electronic market place for bonds and which will be consigned to the technological dustbin of history has yet to come.
Rating diverse trading platforms poses a challenge. Systems range from online auction systems, cross-matching systems, inter-dealer platforms, multi-dealer systems and other trading systems that cover financial markets ranging from those in US Treasury bills and European government bonds to corporate and municipal credit.
Because niche systems often offer different services to various sectors of the market, comparing them can be difficult. Partly to solve this problem The Banker has split inter-dealer platforms from the others.
Three platforms loom large over the inter-dealer market: eSpeed, BrokerTec and EuroMTS. Daily trading volumes on these sites are already measured in billions or even tens of billions of dollars or euros. Many of the bond desks polled by The Banker in May and June used all three inter-dealer systems in addition to several niche systems and systems that allow them to trade directly with investors or deal in more specialised and less liquid markets. Sophisticated players often integrate information and trading capability from these and other electronic networks into their own custom-designed trading interfaces.
eSpeed comes out tops
Our poll of 40 trading desks in Europe and the US gives the crown to eSpeed, followed closely by BrokerTec and then EuroMTS. Even though eSpeed comes out top, there are some interesting things to note. For example although EuroMTS ranks third in the inter-dealer category, traders rate the system on a par with eSpeed for liquidity.
One surprise is the fact that although traders applauded BrokerTec's processing capabilities, the system scored less than five out of 10 for liquidity, by far the worst of the three main inter-dealer bond trading platforms. In terms of efficient straight-through-processing, however, the majority of traders gave BrokerTec full marks for its seamless processing power.
TradeWeb out in front
Outside the inter-dealer trading community, the largest US online platform for bond trading, TradeWeb, is the market leader and the most ubiquitous. Most investors polled use the system and, although some traders argue that dealer-to-client systems have had less impact than inter-dealer systems in changing the way the market operates, they acknowledge the significant role played by TradeWeb in the development of an electronic bond marketplace accessible directly by investors.
TradeWeb is the poll's clearest winner, gaining the highest average score of any system in the poll. Although the site, which traded more than $770bn in US Treasury bills in the first quarter of 2001, scored poorly on new issues, it received some of the highest scores for liquidity, access to market makers, independent and neutral management, pricing and speed.
Although other systems were highly ranked, none of them appear as widely used as TradeWeb. Comparisons between other dealer-to-investor systems are complicated by the varying functions they perform. For example, although Bond.Hub is not strictly a trading system but an online research and information tool, it was rated highly by bond investors and therefore included in the results. Willie Brown, who manages a fixed-income arbitrage fund for American Express, says: "What makes this site so powerful is the ability to customise research and regression analysis with data from leading players." In fact, Bond.Hub scored full marks from every respondent for its research function.
The only other platform to be awarded a 10 in any category from its users is eBondTrade. ebondTrade users gave the system full marks for speed of response and efficiency of execution.
Like many systems that have gained critical mass in the US, TradeWeb and Market Axess are now expanding their European operations. Many European traders polled were waiting for systems used by their US colleagues to be installed in the coming weeks and months. Although Market Axess, supported by several leading bond houses, ranks in our top 10 dealer-to-investor trading systems, some traders marked it down for being too complicated to use. One Wall Street bond trading chief at a bank that has invested in Market Axess says: "My biggest complaint is that the system is cumbersome. There are too many steps that have to be completed and this slows down trading. When we are really busy, this is very annoying."
Market Axess is not the only system criticised by traders for being difficult to use. A trader at one of the large Swiss banks speaking about all systems in general says: "The range of investments is generally good, but the trouble is in finding them on the system."
Other repeated criticisms were the fact that most trading systems, apart from those that specialise in new issue syndication, are still too slow to respond to new issues in the market. Similarly, coverage of the corporate credit markets is generally considered poor. While electronic networks have made inroads into liquid fixed-income markets such as government, agency and municipal bonds, they have yet to play much of a role in the corporate credit markets. A credit corporate bond trader at a US investment bank comments: "We try to use the main trading systems, but liquidity is no good, transparency is not up to much. Perhaps there will be an electronic market for corporate credit in six months or a year."
Who benefits?
Another worry for investors is that because brokers and bank consortia own many of the bond-trading platforms, they may not be run for the benefit of investors. Online bond trading ventures owned by bank consortia have already attracted the attention of US Department Justice officials investigating anti-competitive practices. One trader at a leading European fund management firm says: "These ventures generally have their own agendas that do not necessarily reflect their users or the market."
For every convert to electronic trading, there are traders who dislike, distrust and denigrate the electronic trading revolution. Says one trader describing a platform in which his bank is a joint-venture partner: "There is already too much on our screens. We quote prices on the system, but only because we have to."
The top eight electronic trading systems...
1. eSpeed
eSpeed, the 24-hour electronic trading platform run by Cantor Fitzgerald, was spun off from its parent in March 1999. Users can trade in a wide range of instruments, ranging from US Treasury bills, non-US government bonds, Eurobonds, corporate bonds, agency securities, emerging market bonds, municipal securities and European and other repo agreements. eSpeed's total electronic volume in the first quarter of 2001 was $11,500bn, an increase of 64% over the prior year, with more than one million transactions. The company is based in New York.
www.espeed.com
2. BrokerTec Global
BrokerTec Global is a fully electronic inter-dealer trading system set up by 12 leading bond houses and is based in New Jersey in the US. The shareholders now include ABN Amro, Banco Santander, Barclays Capital, CS First Boston, Deutsche Bank Securities, Dresdner Bank, Goldman Sachs, Greenwich Capital Markets, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney and UBS Warburg. The systems cover both the US and European fixed-income markets. BrokerTec began its commercial operations in June 2000 starting with US Treasury bills, notes, bonds, strips, agency debt and European government bonds. Other instruments have since been added, and BrokerTec is gearing up to allow trading of US T-bill futures.
www.btec.com
3. EuroMTS
EuroMTS was launched in 1999 as a pan-European electronic trading system for euro-denominated government bonds. Other divisions of EuroMTS offer trading in non-government issues, for example German Pfandbriefe and French Obligations Fonci
