DEALTALK-Exchanges hoping to add bond trading may have to pay up

Fri Apr 5, 2013 12:09pm EDT

* LSE, NYSE seen as logical buyers for bond trading platforms

* Jump in ICAP shares has some wonder about deal prospects

By Jessica Toonkel

NEW YORK, April 5 (Reuters) - Exchanges looking to follow Nasdaq's lead into electronic bond trading platforms only have a handful of targets available, leaving interested buyers two options: pay up or be left out of the potentially lucrative market.

Nasdaq OMX Group struck a deal on Monday to buy electronic Treasuries-trading platform eSpeed from BGC Partners Inc for $750 million in cash, providing the exchange operator an entry into one of the world's largest and most liquid cash markets.

Robert Greifeld, Nasdaq's chief executive, called the deal a "true game changer" for the exchange's transaction business, noting that more than $500 billion is traded daily in the U.S. Treasury market.

While Nasdaq's stock plummeted 13 percent Tuesday on the heels of the deal, while shares of interdealer broker ICAP , which owns the only other large, electronic U.S. Treasuries trading platform, jumped almost 7 percent, indicating there might be more deals to be done.

Analysts showed skepticism, wondering why Nasdaq paid such a high premium -- 11 times eSpeed's EBITDA last year. Many were disappointed that Nasdaq suspended stock buybacks for the next several months as a result of the deal.

But with equity trading volumes flat, exchanges like Nasdaq are increasingly looking to diversify and getting into U.S. Treasuries and other bond trading makes sense.

"The exchanges are trying to get into more asset classes and many people believe that Treasuries and fixed income have a better future," said Michael Wong, an analyst at Morningstar Inc.

Buying, as opposed to building, these platforms is necessary for exchanges that want to diversify into bonds because scale is key, analysts said.

"You need buyers for it to be valuable to sellers and you need sellers for it to be valuable to buyers," Wong said. "If you build organically, you would have to be bleeding money for a long time with no guarantee of success."

While BCG did not hold an auction for its eSpeed platform, bankers and analysts note that many exchanges, most notably the New York Stock Exchange and the London Stock Exchange Group, would be interested in expanding their fixed income trading platforms.

NYSE has a small electronic corporate bond trading platform, called NYSE Bond, with around 6,000-7,000 bonds that it could increase, they said.

NYSE believes the fixed income market, particularly corporate bonds, is important and that it is well positioned with its current platform, said Kevin Molloy, managing director at NYSE. "We think our model can really help with concerns about where there is liquidity," he said. He declined to comment on whether the firm would look at acquiring a platform.

LSE is a majority owner of MTS, an electronic fixed income trading platform that operates cash and repo markets in 17 European Union countries' government bonds. The exchange has been expanding its offerings to enable investors to trade fixed income securities, a spokesman said, declining to comment on whether the firm is looking to expand into U.S. Treasuries.

There are only a handful of companies that offer such services. ICAP's BrokerTec platform, for instance, is the other primary electronic trading platform for U.S. Treasuries as well as European fixed income products. MarketAxess, a corporate bond platform, currently trades at almost 15 times trailing revenue.

Other fixed income trading platforms that bankers and analysts point to are Tradeweb, which is majority owned by Thomson Reuters, and State Street's GovEx.

"If Tradeweb or BrokerTec were for sale, all the exchanges would look at it," said one industry banker who asked to remain anonymous because they are not allowed to speak to the media.

ICAP confirmed that BrokerTec was not for sale. Tradeweb and State Street declined to comment. A MarketAxess spokeswoman did not return a call and email requesting comment.

LIMITED OPPORTUNITIES

But for exchanges looking to follow in Nasdaq's footsteps, there are challenges -- mainly that none of the few electronic fixed income trading platforms on the market are for sale.

But that could change, particularly given ICAP's stock jump Tuesday, bankers said. ICAP stock hit 314 pence, up almost 7 percent from its opening price of 294 pence, to close the day at 308 pence.

"ICAP has the other major asset in the industry. It is basically an electronic Treasuries duopoly," Wong said. "It is clear these assets have not been valued by the market or analysts to their full extent."

Another obstacle for buyers is the high value of some of the largest competitors. For example, MarketAxess, which is trading above $37 a share, up from around $26 a share last June, is too expensive for any potential buyers, analysts said.

Tradeweb, which is part-owned by a consortium of brokerage firms, would also be a difficult sale because its ownership structure would mean that all of its owners would need to agree on the terms of a sale, if they wanted to sell at all, said one exchange official, who declined to be named because he is not permitted to speak to the media.

And while State Street's GovEx platform could be an attractive target, it is still relatively small, having just gone live in 2009.

With so few options, any exchanges that want to ramp up their fixed income trading may find themselves paying a premium, bankers said.

"The exchanges are trying to figure this space out," said a second industry banker who wished to remain anonymous because he is not permitted to speak to the media. "The challenge is that there are not five or six other eSpeeds out there for sale."

Nasdaq for one believes that fixed income trading is going to be key for business in coming years as interest rates eventually rise and the U.S. Federal Reserve's quantitative easing program, by which it buys large amounts of Treasuries, ceases.

Already, trading of on-the-run Treasuries, or the most frequently traded and liquid Treasuries such as eSpeed offers, is happening in greater volumes than U.S. equity trading, according to Nasdaq.

U.S. equity trades are worth $150 billion a day, compared with $200 billion worth of on-the-run Treasuries traded daily, according to Nasdaq.

"As customers demand additional fixed income products to be traded electronically on a fully executable, central limit order book, we will be there like a catcher's mitt with the capabilities already resident on eSpeed," Eric Noll, Nasdaq's executive vice president, transaction services for the U.S. and UK, told Reuters in an interview.

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