The phone may have dominated fixed income trading but talk is not always cheap. Stephen Gallagher and Paddy Turner discuss why electronic trading will have its day.
What is the history of the company?
Paddy Turner: Rick McVey who is still our chairman and chief executive launched the company in 2000. He had been head of North America fixed income sales at JPMorgan and realised that there was gap in the US market. There was client to dealer electronic trading for government securities and equities but there was not a platform for high grade corporate bonds. The business has developed from there and we now offer electronic trading in 6 fixed income asset classes across 12 currencies including eurobonds, emerging markets, high yield, US agency securities and indices. We opened our doors in Europe in 2001 and went public in 2004 on Nasdaq.
Who is your client base?
Turner: Our client base is twofold – 50 broker/dealers who provide the liquidity for some or all the asset classes on our platform and over 1000 institutional investors in North America and Europe. We are not a retail platform so our institutional base mainly consists of long only asset managers, insurance companies, internally managed pension funds and large wealth managers.
Who do you view as your main competitors?
Turner: Our main competitor has historically been the phone, but the space is rapidly evolving and flow business is increasingly migrating to electronic venues. We see ourselves as offering a complimentary service to the traditional voice broker whose time is increasingly taken up with trades that require a greater degree of hand-holding. The other primary players in our space are TradeWeb and Bloomberg – but we all have different models. Our aim is to harness an increasing share of what we call the sweet spot of institutional credit trading. This tends to be in ticket sizes of €/£10m equivalent or less where we can add real value by providing timely and efficient execution services for our institutional clients.
Can you tell me about the new dark pool service you are launching?
Turner: We rolled out this new service which we call Market Lists for US products earlier this year and the plan is to introduce the full service for European products in Q3. European clients can already use Market Lists to trade US high-grade corporate and $-denominated emerging markets bonds but that will be expanded to include euro and sterling- denominated eurobonds by mid-year. The service allows investors to efficiently distribute their bid/offer order to the broadest community of market participants. The broker/dealers are a key part of the equation. Clients can direct a trade to their chosen broker while at the same time anonymously making their order visible to all other users on our system. We provide a shop window where people can display their wares and conduct price discovery. This is especially important in today’s marketplace where price transparency and liquidity are both at a premium. This new functionality will not only deepen the liquidity pool we offer but most importantly will benefit both dealer and client traders by increasing the likelihood of each finding a match for their flow.
Is there more hand holding with clients as a result of the financial crisis?
Stephen Gallagher: We have taken advantage of the market conditions and have hired more experienced external facing staff. However, we are not going into competition with the broker dealer. We see our service as bringing efficiency to the process, minimising the cost and enhancing the optionality. Our goal is to provide as much assistance to users, whether it is to dealer/traders, buyside execution desks or the community as a whole to find the other side of the trade.
What are the biggest challenges in today’s marketplace?
Gallagher: Illiquidity has become a problem because of the financial crisis, but one of the biggest challenges remains the lack of price transparency in the OTC cash markets.There is no consolidated (post trade reporting) tape in Europe. In the US, there is TRACE (Trade Reporting and Compliance Engine which facilitates mandatory reporting of over-the-counter secondary transactions in eligible fixed-income securities. The Securities and Exchange Commission uses the service, for example, to track OTC trades in fixed-income securities and other secondary markets.)
We launched a service in the US called BondTicker a few years ago which takes live price feeds, enhances the information and then delivers it back to the clients real time. (The data includes real prices as well as MarketAxess estimated spread-to-Treasuries and asset swap spreads for all investment grade and high-yield bond trades – about 30,000 – distributed by Financial Industry Regulatory Authority which was formerly known as NASD).
Do you think there will be a Euro TRACE?
Gallagher: Europe is too much of a fragmented market and at the moment, the regulatory focus is on the credit derivatives market. There is no data service like TRACE and while we have recently launched BondTicker for euro and sterling denominated products it is not as robust because it is missing the real time pricing piece. However, our clients would like to have that type of information tool and if a consolidated tape does happen in Europe, we are all set up to take advantage of the opportunity.
What is MarketAxess’ plans for the future?
Gallagher: Adding more liquidity providers onto the platform is an ongoing process. Out of the total of 50 broker dealers, Europe accounts for about 19. We have been talking to different firms and hope to increase that number to 25 by the end of the year. We are seeing interest from players who were not traditional fixed income market makers but who are interested in building a fixed income franchise. On the institutional side we are seeing demand for new products and asset types. For example, European wealth managers who had hitherto not been amongst the biggest buyers of credit as an asset class have become very active buyers of corporate bonds across all of our currency buckets this year.
What about your plans for Asia and the Middle East?
Turner: We look at the Middle East and Asia as providing our next opportunities. We have recently hired a salesperson for the Middle East and plan to add at least two more for South and North Asia coverage in the second half of the year. There are several large global asset managers and central banks in these regions who are big players in the asset classes we already support and we are looking forward to offering them access to the full range of execution, data and technology services we already provide to the US and Europe’s most active players.[Biographies] Stephen Gallagher (right) is the head of Europe, responsible for managing all European business initiatives out of our London office, a position he assumed in September 2007. Gallagher first joined MarketAxess as head of dealer services in May 2006. Previously, he was head of high grade trading at Wachovia and had held similar positions with Banc of America Securities, Bear Stearns and Merrill Lynch from 1987-2003. Gallagher began his career with Kidder, Peabody & Co in 1983 after serving as a Captain in the U.S. Army in Texas and Germany from 1979-1983. Paddy Turner (left) is the had of European Sales, a position he assumed in April 2004. Prior to joining MarketAxess, Turner held a number of positions within the FIRCC division of UBS Investment Bank in both New York and London, including head of North American non-dollar bonds sales and head of UK IMG flow credit sales. Turner began his career with Swiss Bank Corp in London in 1989 after having received a Bachelor of Laws (LLB) degree from the University of Buckingham. ©BestExecution 2009