A Review of Electronic Trading Systems in the U.S. Fixed Income Securities Markets October 1997
Introduction The Bond Market Association periodically assesses the growing impact of technology in the fixed income securities business through member surveys and other research and analysis in order to provide market participants and observers with a snapshot of the current status, as well as the direction of new developments. Association staff recently identified 11 firms that provide electronic trading platforms for U.S. originated fixed income securities. A brief overview of each system has been included, as well as a description of the instruments that may be traded on the system. Many of the systems have limiting parameters that dictate transaction size and the types of securities that may be electronically traded and executed, and also may restrict the size and volume of trading on a customer-by-customer basis. Transactions in more homogeneous instruments such as treasury and agency securities are more likely to be electronically executed than municipal, asset-backed or other structured or typically negotiated securities. To the extent electronic platforms currently handle transactions in more complex or structured securities, these transactions are typically subject to certain restraints and require telephonic contact to execute a trade. 1
Electronic Trading Systems for U.S. Fixed Income Securities Delivery Firm/System Agency CD CP Corp. MBS Muni Repo Treasury Medium BondNet Trading Bloomberg, Systems, Inc. network Credit Suisse Bloomberg First Boston Daiwa Securities Internet, America/Odd Lot Telerate, Machine Network Deutsche Morgan Bloomberg Grenfell/Autobahn Fuji Securities Bloomberg InterVest Bloomberg, network Merrill Lynch/LMS Bloomberg, network Morgan Stanley/ Bloomberg MS Zeros MuniAuction 1 Internet Ragen MacKenzie/ Bloomberg Auto Execution TradeWeb 2 Internet, Private Intranets 1 Currently planning to commence operations in October 1997. 2 Currently planning to commence operations in the first half of 1998. 2
BondNet Trading Systems, Inc. Credit Suisse First Boston Introduced in 1995 and recently acquired by The Bank of New York, BondNet is a completely interactive, real-time electronic transaction/trading platform servicing the U.S. corporate bond dealer community. The system, operated via a proprietary network, facilitates on-line order entry; broadcast and display of firm bids and offers; automated and anonymous matching; and redistributes a suite of analytic, descriptive and historic bond data. Dealers subscribing to BondNet are able to enter orders contingent on a range of conditions and criteria including spread to treasury, all or none, lots of, or minimum of. BondNet also provides traditional voice-brokering services via its Interdealer Broker Desk. The system is accessible via dedicated UNIX workstations or through an interface with the Bloomberg LP platform. Credit Suisse First Boston allows authorized customers to obtain live pricing and transact trades electronically with CSFB s trading desks globally through a Bloomberg terminal. Customers may execute transactions for U.S. treasuries (GovTrade), agency discount notes (ADNTrade), commercial paper (CPTrade and CPDirect), certificates of deposit (CDTrade and CDDirect) and U.S. and non-u.s. dollar repurchase agreements (RepoTrade and International RepoTrade). All transactions are subject to approval by a CSFB trader, who can accept, reject or counter the level. Daiwa Securities America/Odd-Lot Machine The Daiwa Odd-Lot Machine allows customers to automatically execute trades in all types of treasury and certain agency securities subject to size limits depending on the type of security. The system is available through several third-party vendors and through a Telnet application over the Internet. In addition, the firm allows customers to use a dial-up connection to access the service. The system allows customers to both hit bids and lift offers as well as enter bids and offers. Trades are automatically executed except for cases whereby the market moves against the customer. Trades are automatic, however, when the market moves in favor of the customer. The system is available to institutional investors and broker-dealers. Deutsche Morgan Grenfell/Autobahn Deutsche Morgan Grenfell provides customers with a fully executable twosided market for treasury notes and bonds and mortgage-backed securities. The system is available through a Bloomberg terminal to selected cus- 3
tomers of DMG. Transactions submitted into the system that are equal to or less than the broadcast size are executed electronically by computers that utilize parameters controlled by traders. The system is available to institutional investors and regional dealers. Fuji Securities InterVest Fuji provides customers with the ability to electronically execute transactions in all types of treasury securities in various size ranges. The system is available to institutional investors through a Bloomberg terminal. Functioning as a neutral exchange, InterVest enables institutional investors, brokers and dealers to anonymously trade all forms of U.S. corporate and treasury fixed income securities, and non-u.s. governments, through its electronic system. In addition, municipals and repos will be added in 1998. InterVest subscribers can easily enter orders on-line and view and execute the orders of other subscribers, including orders placed by participating primary U.S. government dealers, in real time. Regulated directly by the SEC, InterVest may be accessed through any Bloomberg terminal or through free PC/LAN connections to InterVest s proprietary network. Merrill Lynch/LMS Merrill Lynch provides authorized customers the ability to view, purchase and sell securities through both a proprietary network and a Bloomberg terminal. Customers are able to purchase treasury securities, agency discount notes, municipals, mortgage-backeds or whole loan repurchase agreements, commercial paper, auction rate preferred securities, and institutional money market funds. Auction rate preferred securities are sold through the use of a Dutch auction system. All other electronic transactions are automatically executed with the exception of treasury security transactions greater than $1 million in size, which are subject to approval. The system is available only to institutional customers. MuniAuction MuniAuction provides an Internet site where broker-dealers and institutional investors can bid for primary offerings of municipal securities. The system allows bidders to either bid for distinct maturities or for an entire issue, whichever option is selected by the issuer. The system also offers an option that allows participants to see all other bids for the security. 4
Ragen MacKenzie/Auto Execution Ragen MacKenzie offers customers the ability to trade zero-coupon treasury and agency securities through a Bloomberg terminal. The system allows the customer to automatically execute transactions that are less than $300,000. All other transactions are subject to approval by a Ragen MacKenzie trader. Customers, mainly NASD registered broker-dealers, are able to hit bids and lift offers on the system and may specify parameters of a trade for approval by the firm. TradeWeb TradeWeb recently announced its intention to create an on-line transaction system that will allow institutional and dealer customers to electronically trade simultaneously with multiple dealers. The system, which is scheduled to be operational in the first half of 1998, will initially offer realtime trading, price information and research for treasury and agency securities. The system will be available through both the Internet and private, secure Intranets. Retail Trading Systems Available on the Internet A large number of firms have begun to offer electronic systems to retail investors over the Internet. Although Association staff has not reviewed these services, it is generally assumed that most of these firms provide offers that are subject to approval before a transaction may be executed. Following is a list of firms that are currently offering investors the ability to place orders for fixed income securities through an Internet connection. Ceres Securities, Inc. Accutrade, Inc. K. Aufhauser and Company E*Trade Securities, Inc. Charles Schwab & Company JB Oxford and Company PC Financial Network Jack White and Company 5
Headquarters: 40 Broad Street New York, NY 10004-2373 Telephone 212.440.9400 Fax 212.440.5260 Washington Office: 1445 New York Avenue, NW Washington, DC 20005-2158 Telephone 202.434.8400 Fax 202.434.8456 www.bondmarkets.com 1997 The Bond Market Association