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Trade winds

22 Jul 2015 By Antony Currie

One of the few bright spots for bond trading hints at a dim future for banks. New rules and volatile capital flows have whacked Wall Street firms’ profit in fixed income, currency and commodities transactions in recent years. MarketAxess is a rare exception, as second-quarter earnings on Wednesday showed. Even this tech-driven upstart’s revenue, though, can’t keep pace with rising volume.

The electronic platform manages to grow even as rivals suffer, as they did in the three months to June. Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley all cited slower trading in corporate bonds as a big reason FICC revenue dropped between 12 percent and 50 percent from first-quarter levels. The top line at MarketAxess, which specializes in corporate debt, jumped 16 percent.

The firm doesn’t hold inventory and is far smaller than most rivals. Its $77 million of second-quarter revenue is just 5 percent of Goldman’s FICC tally alone for the quarter. But MarketAxess, which boss Rick McVey founded while at JPMorgan 15 years ago, matches buyers and sellers just as the behemoths do. And it now pegs its share of the market for U.S. high-grade bond trading at 17 percent.

MarketAxess also offers new ways to trade that may help alleviate recent concerns about declining liquidity. As of last year, it allows investors as well as dealers to propose prices to trade. That broadens the pool of available securities. Volume on what MarketAxess calls its Open Trading platform jumped 149 percent from the same period last year, accounting for a tenth of the company’s total volume.

The strategy helped MarketAxess register a record $245 billion in business in the second quarter, a third more than in the same period last year. But revenue grew by a far smaller amount.

That’s what happens when the middleman’s role shrinks. The attraction of MarketAxess’ model, though, is that investors save an average of 3 basis points a trade, according to the company – a big deal in bondland. Equity platform LiquidNet and others are setting up investor-to-investor bond trading platforms, too. That’s likely to put even more pressure on the bottom line for Wall Street’s largest banks.


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