Ahead of curve

Ex-Goldman Exec Pushes ’70s Fix for Bond Market’s Big Problem

“This is a great example of improving price integrity and transparency by working closely with dealers in a way that meets their needs as well as buy-side customers.”


Chris White wants to drag corporate-bond trading into the 21st century. Or at least the late 20th century.

With a new platform called BondCliQ, White, who made his name at Goldman Sachs as a bond-trading technology expert, hopes to fix a seemingly intractable problem with corporate bonds: that even in the digital age, investors are often flying blind. That’s because most big trades still get done by haggling with a handful of big banks.

His ’70s era solution: a centralized feed with real-time price quotes, akin to the one adopted by the U.S. stock market decades ago. The challenge is getting the establishment to go along. Wall Street dealers make a lot of money trading bonds partly because this arena is far less transparent than equities.

White, who’s been working on the project for over a year, is betting he can sell those same dealers on the idea they have more to gain by submitting bids and offers to his startup.

“Market makers are malnourished around data,” said the 43-year-old White, who says BondCliQ will officially go live in September. “Our big, overarching hope is that we can improve liquidity in the marketplace through an overall improvement in market-data quality.”

Historic Parallels

White says four of the top 10 U.S. corporate-bond underwriters have agreed to provide quotes on the platform, though he declined to say which ones. Two stock-market veterans, including former NYSE CEO Duncan Niederauer, have also put money into the startup. They emphasize what BondCliQ is doing has historical parallels to Nasdaq, which started out as just a bulletin board for stock quotes posted by dealers before evolving into an exchange giant.

The venture is still far from a sure thing. White has faced delays in getting the company off the ground, telling Business Insider last year he planned to have BondCliQ up and running by last fall. And the problem BondCliQ is trying to solve -- the debt market’s lack of transparency -- has been hugely profitable for the biggest dealers. White needs buy-in from those very firms to succeed.

These days, when fund managers want to buy or sell a corporate bond, they have two choices. If the trade isn’t too big, they can break it up on electronic markets and hope prices don’t move too much as the orders are executed.

However, for deals over $2 million or so, investors have little choice but to call up dealers to find out who’s willing to trade and at what markup. And if you want to unload an illiquid bond or need to do a particularly large trade, it can take upwards of a week to complete. (Though many would say post-crisis bank regulations are as much of a culprit.)

 

History Lesson

Today, about 80 percent of U.S. bond deals are still done by phone or over chat. There aren’t any exchanges and everything is negotiated, which gives dealers the upper hand when it comes to where the market is for a given bond. It’s a situation that has enabled the biggest firms, like JPMorgan and Goldman Sachs, to keep a stranglehold on the market.

And it’s not like they have much incentive (or even the legal obligation) to change. The bond market is littered with startups that have tried -- and failed -- to loosen Wall Street’s grip on bond trading and make it more efficient. Names like BondBook, Bond Connect, BondGlobe, BondHub, BondLink and XBond. Even GSessions, the online platform White developed at Goldman, flopped.

“Data is really the big focus in the bond market now,” said Kevin McPartland, head of market-structure research at Greenwich Associates. Nevertheless, “we can’t minimize the importance of the big dealers in the market and their pricing and everything that comes along with it.”

(Bloomberg LP, the parent of Bloomberg News, competes with BondCliQ in providing bond-price information.)

Read the rest of the article via Bloomberg here

  • Nick Baker and Matthew Leising

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