HFT SET TO START ON EUROPEAN GOVERNMENT BONDS
- By Philip Stafford in London and Telis Demos in New York
High-speed trading is set to expand into the European government bond trading market after MTS, the region's dominant trading venue for the securities, agreed a deal with Fixnetix, a UK trading technology company.
The accord will allow customers of Fixnetix, which is carving out a niche as a specialist in tools for high-frequency trading, to trade euro and non-euro denominated bonds of 17 countries on MTS, which is controlled by the London Stock Exchange and also owned by a group of banks.
Trading firms have been pushing to use the high-speed trading, algorithmic and automated trading tools that have transformed equity markets in recent years into new asset classes.
The penetration of high-frequency trading into fixed income markets has been slowed by wider bid-offer spreads, higher costs of connectivity and differences in technology. It has been a presence in US fixed income markets for several years, where platforms such as ICAP's BrokerTec, BGC Partners' eSpeed and State Street's GovX have provided high-speed access market share US Treasuries.
Separately on Wednesday, ICAP announced that it would be moving US products on BrokerTec to a platform based on Nasdaq's Genium INET matching engine software, which it said would lower latency from 10 milliseconds to 200 microseconds.
It will complete a global rollout by the end of the month, bringing another high-speed platform to European sovereign bond trading.
Incoming regulation of financial markets, such as the Dodd-Frank act in the US and the European Market Infrastructure Regulation in Europe, is likely to profoundly change the fixed-income market by requiring central clearing and open access to over-the-counter interest rate products.
While it may move some rate trading into swaps by lowering barriers to entry, it could also potentially make them more expensive and difficult to trade. This comes at the same time that banks are facing higher capital requirements, reducing the number of bonds they hold in inventory and make available to customers for trading.
As a result, some participants and exchanges actually foresee a greater shift to electronic high-speed dealing of cash rate products, especially sovereign bonds.
MTS started out in the late 1990s as Europe's first market mandated to do electronic government bond trading. It remains the dominant platform for many of the market's largest dealer-brokers to trade among themselves, but its technology has begun to lag that of rivals such as BrokerTec.
The agreement with Fixnetix also raises the prospect of NYSE Euronext, the transatlantic bourse operator, pushing further into bond trading in coming years. The group bought a 25 per cent stake in Fixnetix earlier this year with an option to buy the rest of the company. NYSE has separately been trying to expand its tepid cash corporate bond trading platform in the US by adding market-making firms.
The MTS platform operates on a similar partnership that the LSE has with Turquoise, its pan-European equity trading platform. It is 60 per cent owned by the bourse, with the remainder held by a consortium of banks, including Citigroup, Barclays, Goldman Sachs, BNP Paribas, ABN Amro and several regional Italian banks.
Average daily volume on the platform exceeded €85bn and recorded a 6 per cent rise in volumes in the six months to September 30. BT and Interactive Data also provide telecom services to MTS.
