FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Earlier this week, Tradeweb announced that Chairman Lee Olesky will step down at the end of the second quarter. “Mr. Olesky co-founded Tradeweb in 1996, and for more than three decades he has been a central figure in the evolution of fixed income electronic trading,” the company said in a release.
Just what was the landscape for trading bonds electronically back in 1996, when the Dow Jones Industrial Average was about 5,700, Bill Clinton beat Bob Dole in the U.S. presidential election, and the internet was still new?
Actually, there wasn’t much of a landscape at all. Electronic bond trading was more of a curiosity than anything else, at least according to a December 9, 1996 New York Times article.
The article, “A Bond Trader Will Put Quotes and Trades on Line,” was written by Floyd Norris, the long-time financial columnist for the Times and perhaps the best in the business at explaining arcane financial topics to a mom-and-pop readership.
Norris wrote that a company called InterVest, operator of a small electronic trade system, reached a deal that would allow its quotes and trades to be seen by all Bloomberg subscribers. “Intervest (sic) says that under its new system commissions will be lower than the markups charged by brokers and that some of the commissions will be rebated to allow customers to offset all or part of the cost of their Bloomberg machines,” the article stated.
More broadly, “The hope is that the Intervest system will mirror the success of Instanet (sic) in the stock market,” the article continued. “That system, open only to institutions and brokerage firms, has grown rapidly. It allows institutions to trade directly with each other, or to brokers using the system. In practice, it has enabled institutions to often get better prices than they could get trading through Nasdaq or a stock exchange.”
Spoiler alert: the InterVest-Bloomberg venture didn’t work out. InterVest prices and quotes were pulled from the Bloomberg terminal after just 14 months, and InterVest sued, alleging that Bloomberg caved to the market’s entrenched interests, i.e. certain brokers whose profit margins were threatened by bond prices being disclosed.
But, the movement toward more transparency in institutional fixed income markets was inexorable, as the growth of Tradeweb has shown. From effectively a ground-level enterprise in 1996 – on the same floor as InterVest – Tradeweb now facilitates more than $1.1 trillion in notional value per day across its electronic marketplaces in rates, credit, equities and money markets. That does indeed mirror the success of Instinet in the stock market.
The 1996 article wrapped up with a Catch-22 warning for the pioneers of electronic bond markets.
“The biggest problem faced by Intervest is that it is trying to break into a concentrated market, in which size is very important,” the article stated. “Traders who want to buy or sell a bond will tend to go where they think the liquidity is. And liquidity is available where the trading is being conducted.”
”It’s a great idea, and I think it has a great shot at working,” said Ron New, a corporate bond trader for Hanifen Imhoff in Denver who has signed up for the system. ”But the big unknown is how many people will participate.”
More than a quarter-century later, the idea of electronic bond trading has proven to work.
