Higher costs of regulatory capital, has resulted in a massive reduction in bond inventory held by primary dealers, and as a result, banks have been withdrawing from capital-intensive market making operations and embracing so-called ‘capital lite’ agency type operating model.
According to a report from McKinsey and Greenwich Associates, broker-dealers will need to leverage e-trading technology far more to assist their clients in liquidity discovery and help them with trade execution, as it has become increasingly difficult to find the ‘other side of the trade’. As can be seen from the graph below (taken from the report), there has been a huge reduction in the inventory held by primary dealers, which has directly impacted their ability to provide liquidity to clients.
In less liquid markets like corporate bonds, banks have switched from providing clients with principal based execution from their own inventory, to an agency model, where they leverage their network of contacts to help clients find the other side of the trade, and charge them a commission fee. To help solve this liquidity discovery problem, a plethora of new platforms (such as Algomi – one of the more interesting entrants with their Honeycomb offering, Trumid, electronifie and Bondcube) have launched that seek to create and leverage a type of ‘social network’ for bond inventory, embracing ‘all-to-all’ model in the search for liquidity.
Unfortunately, given the number of new platforms, and the limited ability for participants to on-board more than a few of the new platforms, many have struggled to gain traction in the market, and the latest casualty is newcomer Bondcube, which went live only three months ago, and has now filed for liquidation.
Paul Reynolds, CEO of Bondcube is a veteran of the bond market, having worked on Deutsche Bank’s Autobahn and bond pricing at UBS. Late last year ahead of the launch of the platform he was quoted as saying:
“We aim to launch in November subject to regulatory approval and hope to have 100 buyside clients. I would be ecstatic if investment banks join the platform but that is not necessary for the launch.”
Bondcube, partly owned by Deutsche Borse was an all-to-all dark pool, the idea behind the platform being that:
- Buy-side has significant liquidity locked up in orders that have ‘failed to trade’
- Bondcube enables the Buy-side to post that liquidity without market risk using indications of interest (IoI)
- Dark matching means negotiations are only between traders who want to execute the same trade, no one else is aware of the order
- Bondcube believes there is latent liquidity in historic orders and limit orders. Both of these order types are match-able and negotiable in Bondcube
In a statement, Deutsche Borse conceded that despite succeeding in launching,
“sufficient business prospects failed to materialise” and consequently “the shareholders decided not provide further funding”.
It will be interesting to see which of the other new platform entrants are able to gain sufficient traction fast enough to survive!