Three of Wall Street's bigest investment banks have joined forces to build a new electronic bond trading system. The three firms, Goldman Sachs, Merrill Lynch, and Morgan Stanley Dean Witter describe the BondBook initiative as representing "a major change in the structure of the fixed-income markets".
The system is being built to enable direct trading between market participants with complete anonymity, improved price transparency and enhanced liquidity. To guarantee liquidity, BondBook's backers are committing significant trading activity to the platform, including the secondary trading of new issues. In addition, the three securities firms will provide credit support to BondBook, which will serve as a credit intermediary to all participants.
Initial trading, expected to begin in the fourth quarter of 2000, will be in investment grade and high-yield corporate bonds, and in municipal bonds. BondBook has filed for registration with the Securities and Exchange Commission (SEC) as a broker-dealer and has applied for membership in the National Association of Securities Dealers (NASD). It will be regulated as an Alternative Trading System (ATS) under the SEC Regulation ATS (300).
BondBook's formation marks the first time that leading broker-dealers have joined to commit initial liquidity and credit support to a single electronic and anonymous trading market. "Our goal is to create a more centralised and efficient market," says Jim Pellicane, a Merrill Lynch Managing Director, who is serving as co-Chief Executive Officer of BondBook with Larry Buchalter, a Goldman Sachs Managing Director. Pellicane led the fixed income business within Merrill Lynch's direct markets group, its institutional e-commerce division. Buchalter heads Goldman Sachs' electronic commerce effort for its fixed income, currency and commodities division.
"We've been pleased by the positive response BondBook has received from both the investor and broker-dealer communities," says Buchalter. "The advantages of a single, electronic platform for price discovery, execution and transaction reporting presents a compelling value proposition to all market participants."
Money manager Putnam Investments is to chair an external Advisory Board for BondBook to help ensure that the system addresses the complex needs of fixed income investment firms and portfolio managers.
Tim Ferguson, senior managing director and head of investments and technology at Putnam, says: "BondBook represents a major advance for the electronic market in fixed-income investments and will result in improved market structure and greater market efficiency. Consistent with our fiduciary responsibilities, we expect that we will take full advantage of the combination of transparency, anonymity, and liquidity that BondBook will offer."
Andersen Consulting has been providing project management, systems design and implementation services for BondBook's core trading operations, as well as for BondBook's enterprise-related systems. Broadcort, a Merrill Lynch subsidiary, will provide clearing services for BondBook.
BondBook will have its own management and operational facilities based in New York. Its initial focus will be on improving liquidity and transparency in the targeted fixed-income markets. Later, BondBook expects to consider additional initiatives, including expansion into other products and geographic markets, post-trade information processing and reporting, and extending the platform into the new issue and capital-raising process.