Despite the recent slowdown in international bond issues out of Asia, there's been plenty of activity in promoting the outstanding bonds and getting them traded online. With the internet only just beginning to transform the fixed income scene and Asian bond activity likely to increase in the next few years we can expect many more announcements in this area as traditional bond houses compete with start ups, each other, and sometimes even themselves.
One of the first Asian online bond trading ventures on the scene, Asiabondportal, has launched its pilot trading system this week and in a seemingly unrelated announcement three of the big four brokerages in Japan - Daiwa, Nikko and Nomura - have said they intend to form a multidealer online bond market.
If you dig a bit deeper, though, you can see the connection. The latter deal will double the online bond presence of the Daiwa Group, whose wholesale arm - Daiwa SB Capital Markets - took a strategic equity stake in Asiabondportal in June. Previous investors in the site, started by fund management firm Income Partners, were JP Morgan, Deutsche Bank, Government Investment Corporation of Singapore (GIC) and software company Sybase.
Hedging their bets
According to a report in Japan's Nihon Keizai newspaper, Daiwa will join with Nikko and Nomura to begin online trading of government, municipal and corporate bonds by spring of 2001. With the help of Daiwa SBCM, Asiabondportal plans to have a Japanese language version of its site running before then, and COO Tom Holland says he's not surprised that Daiwa would also be looking at other options.
"Daiwa teaming up with Nomura makes a lot of sense regardless of whatever other positions the company is in," he says. "You see a lot of investment banks globally taking this strategy." Holland says he is not yet sure how Daiwa's deal with Nikko and Nomura might effect Asiabondportal's operations in Japan.
Daiwa's move is similar to Deutsche Bank's investment in BondsInAsia, another online bond trading system that was announced last month. BondsInAsia will compete with Asiabondportal (another Deutsche investment) in offering online trading of domestic and international bonds in Asia, but BondsInAsia has more of a focus on local markets - encouraging participants to become franchisees of separate regional trading platforms. BondsInAsia plans to go live in 2001.
Pilot trading
Asiabondportal's site has been in operation since November 1999, offering research and pricing information on the bond markets, but its trading engine has just been completed and the three stakeholder financial institutions began pilot testing of the secondary market platform this week. "Everything's ready except from a legal perspective," says CTO Gideon Sheps.
The company is waiting for regulatory approval from the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore before it can begin actual trading. There should be few obstacles to approval in Singapore, at least, thanks to the involvement of GIC, and Holland says he expects that in a few weeks, Asiabondportal will be able to start providing services to over 100 financial institutions that have expressed interest in trading on the site.
Asiabondportal is a multidealer site where institutional investors can trade - as opposed to be matched - with dealers, but not with each other. Buyers can execute trades on firm prices or solicit bids and offers from competitive dealers and negotiate prices online. All this is done with full disclosure of identity - everyone knows who is dealing with who.
Holland says that Asiabondportal avoided the anonymous order matching model for two main reasons. One is to do with keeping the broker-dealers happy, and the other to avoid the problem of counterparty risk. Anonymous systems can lead to the dealers being cut out of the process as investors start buying and selling among themselves, and as the dealers pull out of these systems they are left with much less liquidity. Holland says that for an online bond dealing system to be successful, "You need to have the dealers involved."
Counterparty risk is another problem with anonymous trading, particularly in Asia. In the wake of the 1997 financial meltdown financial institutions have become much more wary of who they deal with and how well they can be expected to perform.
Holland acknowledges that there is some scepticism in the bond trading community about the value of online trading. Many larger institutional investors might prefer to keep their personal relationship with a salesman and are already well served with buy-side information. "Realistically, larger clients in Asia are overbrokered," he says. He expects to see the major growth from small to medium investors who might not get the service levels they desire because they invest less frequently.
The site currently offers trading in dollar-denominated bonds, but by September it will offer yen, and Hong Kong and Singapore dollars. Holland says Asiabondportal's commission structure and price is similar to that charged by interdealer brokers, that is, the commission is paid by the broker-dealers so the price that is seen by the buy-side is what they pay.
For the time being Asiabondportal will just be a trading engine for the secondary market, but primary issue functionality will be looked at for 'phase two', says Holland. Issuing bonds over the internet is a much more difficult and controversial process, so it's not surprising that Holland isn't keen to commit to a timeframe. "Now we're completely focused on the rollout so it all depends on how this goes," he says.
