Alternative Trading System (ATS) upstart OpenBondX, LLC (www.openbondx.com) plans to radically improve electronic bond trading with its imminent launch in Q1, 2015.
Offering unbiased access to liquidity from both non-traditional and traditional providers—together with pioneering order types--OpenBondX (OBX) brings the advantages of electronification and the opportunities for market-based price discovery to the secondary bond markets.
The OBX ATS is a true "all-to-all" system, meaning that any and all bond-trading participants—both buy- and sell-side—are welcome to trade with all categories of counterparties. The need for a platform that unites institutional bond traders as natural liquidity suppliers to one another has never been greater. Tighter regulatory capital rules have caused corporate bond dealers to slash inventories by about 70% since 2008, and consulting firm GreySpark Partners estimates that buy-side firms held 96% to 99% of U.S. corporate bond inventory in 2014.
With equal access and a transparent fee structure for all subscribers, OBX effectively unlocks fragmented liquidity. It also eliminates the information leakage and discriminatory pricing issues that have plagued fixed income markets because the identity or type of the counterparty is known.
An extensive set of built-in risk controls help trading participants (including their prime brokers and clearing firms) comply with SEC Rule 15c3-5 and manage trading risks. Real-time tools cover such aspects as Value-at-Risk (VAR) validation on executed trades and open orders, aggregate value traded, duplicate order check, user access controls, configurable self-match prevention, restricted lists for securities and FIX drop copies.
Another advantage that OBX offers to the fixed income markets is full anonymity between all participants. Broker-dealers, institutional investors, hedge funds and quant traders are empowered to seek natural trade participants without identification. Trades will be printed to TRACE as OpenBondX, and each side of the trade will receive DVP settlements with no indication of their trading counterparty, thus preserving full anonymity.
A proprietary new trading protocol improves price discovery
As numerous market experts and participants have pointed out, existing bond trading protocols such as Indications of Interest (IOI) and dealer-to-client and dealer-to-dealer Request For Quote (RFQ) impede buy-side price discovery. OBX's fully-automated order book employs, as its initial trading protocol, an innovative hybrid they've developed called RFFQ™ (Request for Firm Quote™), which enables participants to efficiently tap into hidden prices and competing quotes in an auction-like manner.
Initiators of an RFFQ™ specify the issue, size, side, limit price and order time limit, with the option to display only a portion of the order quantity (similar to an "iceberg" order type). Participants can view historic TRACE prints on specific securities to help in determining the order's limit price. Once risk checks are satisfied, the order is broadcast to all subscribers, without the price visible. Participants can respond until order expiration with a price for the displayed size—or even a larger quantity—potentially unleashing more liquidity.
At expiration, the initiator's order is matched against all responses using price-size-time priority. All initiated orders and responses are firm unless canceled prior to RFFQ expiration. All matches are firm, thus eliminating the harmful practice of "backing away."
"Every facet of OpenBondX and its technology have been built from the ground up to encourage providers to contribute liquidity and safely expose orders to the most aggressive pricing available, all under absolute anonymity," states OBX cofounder and CEO Alistair Brown. "By automating the bond markets as such and attracting liquidity from non-traditional providers, we believe our ATS will drive true two-way markets and significantly reduce trading costs," he explains.
A fixed-income platform uniquely designed and operated by e-trading veterans
Both Alistair Brown and Chief Operating Officer John Jacobs are internationally recognized financial markets visionaries who have helped transform the electronic trading markets. Drawing on their extensive technological expertise, the duo has developed a trading platform that is unrivalled in the fixed-income marketplace for its intuitive user interface and sophisticated tools such as advanced order types and real-time risk controls. Users access the OBX ATS via FIX or Browser Trading Application, eliminating the need for complicated software installations.
Based in the U.S. and independently owned, OBX expects to launch in Q1 2015 for trading in U.S. corporate bonds. Unlike other fixed-income ATSs, OBX expects its "all-to-all" marketplace, RFFQ™ protocol and advanced trading tools will attract a significant amount of liquidity from non-traditional sources—with the objective of improving fill rates for all participants.