æDestroy your businessÆ is Jack Welch of GEÆs famous maxim. And that is just what those brave bond buccaneers at HSBC, Citigroup and Deutsche Bank appear to have done. Their new electronic bond trading system û BondsInAsia û is set to shake up the market.
The trio of banks û along with information and technology company Bridge û has set up a new joint-venture company, which will offer regional electronic trading platforms for Asian domestic and international bonds. Each party has a 25% stake in the new company.
The business model is designed to allow the banks to roll out the system in each local market in Asia while making it flexible enough to adapt to each marketÆs idiosyncrasies. In this it differs from its main rival in this space û Asia Bond Portal û by being primarily focused on the local markets, which it intends to serve. It will roll out with G3, Hong Kong dollar and Singapore dollar bond trading platforms in early 2001. And then it will focus on the fast growing local bond markets of Thailand, Korea and Malaysia.
But how will it work? The system will rely on getting as many as possible of the existing participants in the local markets to become franchisees of the local trading system û BondsInHongKong, BondsInSingapore and so on. Once it has a critical mass, it will allow existing dealers to post prices through its password protected system so that the end users, the investors, can see which institutions are offering the best prices. There will then be automatic execution through the Bridge eMarkets system.
As most Asian bond markets are presently dominated by over-the-counter trading, the system will not be taking business away from the local exchanges. Rather, it aims to create a virtual exchange with common standards that are modified for the local markets.
Participants become market makers
Key to this is that BondsInAsia will not be the market maker. Rather, the franchised institutions that are part of the system will have a responsibility to make markets themselves with their existing client groups, but to offer the prices over the BondsInAsia system.
All fine and dandy, I hear you cry. But really, what is the point of it all? Surely the bond markets in Asia have been functioning perfectly well up to now? The three institutions claim to already handle over 50% of Asian local and international bond deals. So why try to change what must be a highly profitable grip they have over the market?
ôThere is no point standing in the way of an unstoppable force,ö says Ken Yeadon, head of fixed income sales bond trading at HSBC in Hong Kong, slipping into a new economy fervour. ôThe investor wants more transparency and liquidity and we must be the ones to provide it.ö
The theory behind this is that AsiaÆs bond markets are not very transparent and are even less liquid. With this system in place, the whole market should become more transparent and liquid. With added liquidity, trading volumes should rise. So while the banks behind this system might get less market share, the overall market will be bigger, giving them a net sum gain.
ôLiquidity has been low in Asia because such a system has not yet been in place,ö says Steve Roberts, head of Asian fixed income at Salomon Smith Barney in Hong Kong. ôBondsInAsia will allow the whole market to develop to an entirely new plane.ö
One interesting sideshow to this deal is watching how three implacable rivals have bitten the bullet and joined forces to offer this service. Deutsche Bank is even an equity holder in the system's main rival û Asia Bond Portal. By throwing so many resources at such an ambitious scheme they are aiming to get the first mover advantage, in the hope that one of the systems will take off and become the market standard. It remains to be seen if investors will be as confident in the service as the shareholders are.