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CommentP&M Notebook

P&M Notebook: electrical storm?

E-trading is starting to touch even the slowest, least liquid corners of credit. It’s less powerful than its most convinced adherents hope, but it’s coming, like it or not.

Every year since the internet became a thing, e-trading has been about to burst forth and revolutionise the world of bond trading, and every year, it hasn't.

First the banks spent serious cash setting up their own platforms, the likes of Deutsche’s Autobahn, Goldman’s Gsessions, and Barclays’ BARX. Then, realising that few investors wanted to have 10 different bank systems open all day, the banks started backing some of the multi-dealer platforms.

Incumbents like Bloomberg, Tradeweb, and MarketAxess did well; but plenty more platforms and technologies emerged, each promising a slightly different flavour of trading protocols, execution, information and connectivity. The tussle for market share, investment bank liquidity and investor connection is still going on — many observers expect most of the new bond trading platforms to die out or get taken over — but meanwhile, even some of the slowest moving credit asset classes, European ABS trading in this case, are getting involved.

BNP Paribas and DZ Bank, anyway, have started using Bloomberg’s ALLQ system for some of their flow RMBS and ABS trading, hoping this will extend their client reach and encourage others to adopt the system.

It’s not seeing loads of use at the moment — ALLQ is basically a way of putting several dealers in automated competition with each other to meet a request for quotes, so you need a few more banks on board before it’s helpful — but some trades have already gone across the platform and, as with other e-trading initiatives, it could make things smoother and easier eventually, even if at first it appears to be solving a problem that doesn’t strictly exist.

BWICs in European ABS trading, which account for lots of the trading activity in more unusual assets, already have their own “electronic” marketplace in the form of Empirasign, which posts upcoming BWICs, cover levels, and most recent trading levels. It’s not an execution venue, but it is much better than emailing or instant messaging BWIC announcements, cover and colour in different, incompatible formats from every different trading desk.

As with all e-trading initiatives, there are power dynamics underlying all the fluffy talk of market transparency and efficiency. Banks with big, dominant distribution networks may see less benefit from showing their liquidity into more transparent venues than the small banks. Similarly, the largest buy-side firms can be assured that banks will bend over backwards to win and keep their business, while small accounts might struggle.

GlobalCapital also spent much of last week poring over the rest of the Deutsche restructuring. Particularly eye-catching was the claim that the bank wanted to get its FIG capital and SSA franchises up to the standard of corporate DCM — an admission, in a way, that the bank’s been slipping in the last year or two.

Both are potentially expensive places to fight. The profits to be had in FIG capital are a fine thing, and to the extent that reciprocity is still a factor, an €8bn rights issue and a few TLAC trades should give Deutsche a nice leg up. But lots of banks have FIG capital franchises, and the largest firms with the most interesting deals to do generally send the bulk of their work to their own syndicate desks.

SSAs, meanwhile, don’t need lending, but require commitment of other kinds — trading turnover, participation in government auctions, and the offer of long-dated cross-currency swaps which can’t be cleared and might not be collateralised. The latter are exactly the sorts of assets which Deutsche is supposed to be offloading or running off, through its newly carved out "legacy assets” section (not, repeat NOT, the same as a non-core operation). So the bank’s approach will be interesting, at least.

If Deutsche wants to scramble back up the league table in both areas, does that mean hiring, or other ways to splash the cash?

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