Liquidnet brings dark pool expertise to bonds

Tue Mar 18, 2014 1:28pm EDT

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LONDON, March 18 (IFR) - The equity market's largest dark pool operator is turning its hand to the corporate bond market, where a sharp drop-off in market liquidity has fuelled fears over buyside investors' ability to exit positions once the 30-year bull market in bonds comes to an end.

Liquidnet, which oversaw USD470bn of global principal in equities traded on its platform last year, has acquired bond-trading platform Vega-Chi.

"The traditional means of trading corporate debt are no longer viable. Like in the equities market, the buyside understands that only it can solve the problem," said Seth Merrin, founder and CEO of Liquidnet. "Liquidnet is a neutral venue with massive amounts of liquidity thanks to our buyside relationships. Our acquisition of Vega-Chi means we now have the right technology to offer this service in fixed income markets."

Liquidnet brings to the table its experience in off-exchange equities trading and extensive client book - its 750 members hold USD13trn in equities under management.

Vega-Chi has operated a central limit order book (or CLOB) for US and European high-yield bonds since 2012 and a multilateral trading facility for European convertible bonds since 2010. The two firms now plan to introduce investment-grade securities this year.

Both buyside and sellside firms can enter prices on the bond trading platform, remaining anonymous throughout the entire process.

If the trade is executed between two buyside investors, either the investors' custodian banks or Vega-Chi's own agent settle the deal.

The minimum trade size is USD500,000 and goes up to USD5m on the CLOB. Currently, the average market trade size on other electronic bond trading platforms is around USD300,000.

The platform also provides a second trading protocol for larger block trades - of USD5m or larger - which is closer in nature to the dark pool concept in the equities market.

The average trade size is USD1.5m across the platform.

"The prices and liquidity on Vega-Chi are the result of natural flow from both buyside and sellside participants, with all prices being firm and executable. This is very different than other venues that stream 'forced quotes' with wide bid/offers in small size," said Constantinos Antoniades, founder and CEO of Vega-Chi.

NEW PLATFORM, OLD PROBLEM

Liquidnet's sally into bond markets represents the industry's latest attempt to build a viable bond trading platform to help alleviate the chronic lack of liquidity in corporate bond markets.

Buyside funds have mushroomed in size to USD840bn, according to Citigroup, on the back of a glut of global debt issuance, while dealer inventories have cratered to USD37bn from a peak of USD325bn in 2007.

Several bond e-trading platforms established by both buyside or sellside firms have already struggled to gain traction.

For their part, sellside banks remain sceptical about the benefits of trading on multilateral trading facilities. However, several top-tier investment banks are understood to be close to signing onto Liquidnet in the near-future.

"The sellside are very important. They also have the same problem as the buyside, so we believe they will participate in any offering that helps them to trade out of their positions," said Merrin. (Reporting by Christopher Whittall, editing by Matthew Davies)

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