“Bondcube is the network that connects everyone together, trading bonds just happens to be the outcome.”
One of the recurring themes in the Australian corporate bond market is that it is not liquid enough: not enough issuance and not enough trading. Naturally the issuance versus liquidity debate comes down to a classic chicken and the egg dilemma: which must come first?
It was only a matter of time before some bright investment minds would turn to solving the problem of making the trading of corporate bonds easier for participants by leveraging new technologies to make it possible, in the same way that both Uber and Airbnb met demand in their own sectors. This is where Bondcube comes in.
Bondcube is a London- and Boston-based electronic bond platform that links dealers and customers in a single marketplace in order to boost the liquidity of the global bond markets. Deutsche Börse owns a 30% stake in Bondcube, which styles itself as ‘the future of bond trading’ and a place ‘where Silicon Valley meets Wall Street.’ But what is it exactly? According to Bondcube, “We recognise that fixed income trading is an intensely social activity so we use technology more often found in social media to leverage that dynamic … Bondcube is a combination of technology from social networks, consumer technology and financial markets … a vast resource of latent liquidity hidden in buy-side order books. These orders have either failed to trade over existing request for quotation (RFQ) platforms or buy-side to sell-side negotiations. A fast growing number of buy-side clients are now placing those indications of interest in Bondcube and finding matches all over the globe with other users.” YieldReport asked New York-based CEO of Bondcube, Paul Reynolds if he has had any interest to date from Australian clients. “Yes,” Reynold says. “We have one signed up and another processing the paperwork.” The broad idea is to become a truly global platform for the online buying and selling of corporate bonds. “Matching users all over the globe means both large and illiquid orders can be matched and negotiated anonymously with an intermediary bank acting as the counterparty to both sides.”
“The connections we have seen amongst users is quite astonishing. A user in Zurich connecting directly with a user in Sydney, a user in Frankfurt connecting directly with a user in New Mexico. A truly global network,” Reynolds says. At present there are already Australian bonds tradable on the service. “If you look at the ‘live liquidity’ on the website you can see we have $2.4m of bids and $0.4m of offers. If you register you can see which bonds that volume is in,” says Reynolds. Before new clients sign up for the service they can use the Bondcube website to upload their list of securities and receive email alerts when the trading platform has liquidity in any of these securities. Liquidity is displayed in the form of indications of interest, posted and searched for using dark matching.
According to the founders, unlocking buy-side liquidity is the key to increased traded volume at better prices. The buy-side and sell-side can trade with each other using existing credit lines. The difference is in Bondcube there is no RFQ infrastructure nor liquidity provider role for the sell-side. Dark matching means negotiations are only between traders who want to execute the same trade. No one else is aware of the order.
YieldReport asked Reynolds to describe what the typical Bondcube transaction looks like. “We get between one and 10 matches a day from about 1,000 orders,” says Reynolds. “Most are buy-side to buy-side negotiations. Normally the two counterparties would never be able to discover each other, now they can source liquidity in a totally new way.” How does Bondcube make money from the trading process? “Bondcube is free to connect to and runs over the web,” says Reynolds. “In a buy-side to buy-side trade an intermediary bank, UBS or ITG, clears the trade. Both buy-sides pay a fee to the intermediary. All bonds are set at 0.05%. So if two buy-sides negotiate a trade between themselves at 100.00 the seller sells to the intermediary at 99.95 and the buyer buys from the intermediary at 100.05. Bondcube is paid 0.03% (three cents) by the intermediary.”
Does Bondcube have any plans to tackle the Australian market? “We have no sales force in Asia,” says Reynolds, “but most of our inquiries come through our website anyway.”
“The reality is there is a huge burst of creative and well-funded innovation underway in the fixed income market… we have observed that the most willing users are the mid-tier to smaller clients who have effectively been dis-enfranchised from institutional dealer liquidity. The top tier enjoy an entirely different level of service. We have tried to lower the entry cost for them by making useful information about order volumes and individual securities available through our website. Additional features like alerting users to new liquidity in security lists they have uploaded into the website have proved to be extraordinarily popular. We call this search our liquidity. This openness and ease of use seems to have struck a chord with users in a way that leads me to believe that Bondcube is fast becoming the accessible medium for valuable and apposite liquidity discovery,” Reynolds says.
And a final world? “Bondcube is now in that zone between interesting concept and staple of life.” You read it here first.