Below extract courtesy of Wall Street Journal, as reported by Katy Burne
Institutional equities-trading platform Liquidnet is preparing to launch a credit-trading network in the fall, following regulatory approval last week of its acquisition of high-yield bond platform Vega-Chi.
The initiative is the latest example of a technology company seeking to shake up the way corporate bonds trade, amid a challenging fixed-income trading environment and an increasing willingness by debt investors that traditionally use the telephone to buy and sell on electronic systems.
Liquidnet is privately held, with a majority interest owned by founder and Chief Executive Seth Merrin. Its purchase of Vega-Chi, announced in March, is scheduled to close Friday following approval of the deal in late July from the Financial Industry Regulatory Authority.
Liquidnet’s move comes at a time when investors have complained of liquidity constraints. While the size of the U.S. bond market has more than doubled since the financial crisis, trading in corporate bonds has fallen as dealers acting as middlemen have slimmed their debt holdings.
Some bond investors have looked to trade with one another, bypassing major Wall Street banks. The shift is fueling a wave of interest from startups and technology specialists who believe the highly fragmented bond market could eventually resemble parts of the more-liquid stock market.
“Some aspects of the corporate bond market may have similar hallmarks to the equity market,” said Will Rhode, global head of capital markets research at The Boston Consulting Group.
Liquidnet hopes to attract debt traders from more than 700 of the world’s largest institutional asset managers that it counts as clients for equities trading, merging interest from those firms in bonds with those investors already using Vega-Chi.
The firm’s equities-trading clients control a combined $14 trillion of assets and are estimated to own about 75% of the U.S. high-yield bond market, said Mr. Merrin in an emailed statement.
In one part of the platform, Liquidnet will act as a matchmaking service for traders whose orders are to buy or sell between $500,000 and $5 million. Investors will be able to see and act on prices immediately, unlike on some bond venues where prices posted are used just to start negotiations.
In another segment, Liquidnet will offer investors the ability to trade in “blocks,” or larger sizes of $5 million and above. Prices will be visible only to traders who have opposite orders within a given proximity.
“We are like an exchange,” said Constantinos Antoniades, the incoming head of fixed income at Liquidnet and a former convertible bonds trader at Goldman Sachs Group Inc.GS +1.87% in London, who launched Vega-Chi in Europe in 2010. “Everyone can contribute prices and trade with everyone else.”
Since Vega-Chi launched in the U.S. in 2012, it has attracted $73 billion of orders and has 50 users in the U.S. and another 100 in Europe, but Mr. Antoniades didn’t disclose the volume of trades completed over that period.
Its initial focus, after merging its systems with Liquidnet, will continue to be high-yield bond trading in the U.S., and convertibles and high yield in Europe. It plans to add investment-grade corporate bonds in the U.S. and Europe early next year.
Mr. Antoniades added he hoped four large-securities dealing banks would join the platform in the fall, although he expected most of the liquidity to be provided by investors.