Some of Europe’s biggest lenders have opened their doors for a former UBS Group AG executive to install an internal search machine that tracks availability of their bonds. Especially the ones people rarely trade.
HSBC Holdings Plc, Deutsche Bank AG and Credit Suisse Group AG are among 14 banks that agreed to use the system developed by Algomi Ltd., according to co-founder Stu Taylor. It lets banks give access to their pre-trade data to fund managers who want to discreetly identify who owns corporate or government bonds that are not widely traded.
Algomi, founded in 2012, increased its asset-management clients to 140 in October from 50 in May. The growth indicates an eagerness among investors for a new technology that helps them trade more efficiently as regulations curb banks’ ability to make markets and expand their bond inventories.
“The bond-market liquidity problem is real and well-documented,” Taylor, Algomi’s chief executive officer, said in an interview at the Fixed Income Leader Summit last week in Barcelona. The company “seeks to address the issue with proper pre-trade information. None of this data appears on websites and terminals. This is why we are different.”
The market-making pinch has worsened in the past five years. The size of U.S. Treasury market, for example, has expanded by more than 45 percent in five years to $12.9 trillion, according to data compiled by Bloomberg. At the same time, the five largest primary dealers — those financial institutions that trade with the Treasury — have cut their balance sheets by about 50 percent from 2010, according to data from Tabb Group LLC.
In longer-maturity German bonds, Europe’s benchmark sovereign securities, the size of transaction that can be executed at the best available bids and offers, a market gauge known as order-book depth, dropped to 16 million euros from 25 million euros in the first half of the year, the Bank for International Settlements said in September. The decline means even a relatively small increase in trading volume can spark larger price swings.
Algomi harnesses data from banks so it can be searched by its buy-side clients using its Honeycomb network. Once given permission, an investor can click on debt he wants to buy or sell, and a heat map will appear on the screen. It may show, for example, that HSBC traded that bond a week ago or that Deutsche Bank currently has interest in the issue. Banks may share pre-trade data with their own customers to show them what’s available.
Spokesmen for HSBC, Deutsche Bank and Credit Suisse confirmed they’re involved with Algomi.
Changing Landscape
The London-based company is trying to capitalize on the changing landscape of fixed-income investing. Regulations that reduce dealers’ market-making capacity and central-bank monetary intervention are two key factors that have sapped liquidity, making it more difficult to trade some bonds without causing exaggerated price swings.
“It is wrong to think that these regulations are misplaced,” Taylor said. “They are there because we had a problem, and risk was not handled appropriately,” said Taylor. “Let’s start working on how to behave in the new market. We do need to be more creative.”
Algomi entered into a space where companies compete to offer liquidity solutions, although not everyone is successful. Fixed-income trading platform Bondcube collapsed in July after three months. While Algomi is different from Bondcube as it offers aggregate pre-trade information, it’s competing with numerous initiatives that promised to make life easier for bond investors.
UBS Alumni
Taylor was formerly UBS’s global head of matched principal trading in fixed income. He set up Algomi with three UBS alumni: Usman Khan, who developed a dark-pool bond trading platform for the Swiss bank, Michael Schmidt, who once headed its European credit trading, and engineer Robert Howes.
The London-based firm had financial backing from Lakestar LP, a venture capital investor in Airbnb Inc., Spotify Ltd. and Skype, three of the companies that shook up traditional services in hotels, music and telephone communications, according to the companies’ websites.
Algomi’s investment service seeks to restore market depth by creating virtual inventory of bonds in a similar way to how Airbnb fostered a marketplace for lodging, Taylor said. The Airbnb website, which allows people to advertise and rent, now says it has 1.5 million listings across 190 countries.
“Virtual inventory can be scaled and grown much quicker than real inventory,” he said. “This is the same problem that banks have. They’ve been running on a real-inventory business model based on risk. This new type of technology can bring back market velocity.”
Bloomberg LP provides bond-trading services in competition with banks and securities firms.
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