LONDON: HSBC is the latest firm to launch an electronic platform for trading corporate bonds, as participants look to encourage greater trading between buyside investors to combat the drop-off in market liquidity.
HSBC Credit Place went live in October 2013 and launched at the start of the year, although no public announcement has yet been made.
Thirty-four investors have since joined, while a further 16 clients are in the process of signing up. "There is a fundamental problem in the credit markets that won't go away: the buyside now holds around 99% of outstanding corporate bonds.
Investors need to move more bonds between themselves, and we think our platform is an effective way for them to do that," said Niall Cameron, global head of credit at HSBC.
Credit Place currently shows live prices on around 1,000 securities traded off HSBC's London bond desk and 400 securities from its Hong Kong unit. It eventually plans to offer prices on 2,500 bonds in total.
HSBC quotes live bid and offer prices throughout the day on all the securities on its platform. Clients can trade on these prices or use them as a guide to enter their own bid or offer, which will be displayed on the screen in a different colour from HSBC's prices in order to distinguish them.
If a client opts to trade on a price quoted by another investor, HSBC will then stand in the middle and settle the trade. Both clients remain anonymous throughout the entire process. The platform currently receives ten orders a day on average, around half of which are executed.
"Clients will see prices as soon as they turn on screens in the morning. That's an important function it provides a framework for clients to put their own orders in and encourages crossing to happen," said Cameron.
The platform is aimed at large-scale transactions. These block trades are an area of the market that has been particularly badly affected by banks' decision to scale back capital provision as a result of more stringent regulation.
The minimum ticket size is EUR500,000 on high-yield bonds and EUR1m on investment-grade securities. The average trade size on Credit Place is currently EUR4.2m over 10 times bigger than the average ticket size on other platforms of around EUR330,000.
There have been trades of up to 40m in size, while tickets in the EUR10m to EUR20m range are not uncommon, Cameron said.
CHRONIC LIQUIDITY SHORTAGE A number of electronic bond platforms have sprung up to help address the chronic drop-off in bond market liquidity over the past few years, as investors' corporate bond holdings have come to dwarf the size of investment banks' own inventories.
Most offerings have struggled to gain traction so far, with investors remaining sceptical about giving proprietary trading information to any platform run by a single dealer or another large buyside firm.
Goldman Sachs' G-Sessions and BlackRock's Aladdin (which has since partnered up with MarketAxess) are two examples of propositions that struggled to get off the ground initially.
"We understand the issue over single-dealer platforms, but to get true multi-dealer functionality is difficult. If it's just the axes that people are posting, then the majority of the screen will be empty," said Cameron.
"We wanted to get out there with a platform that clients can transact with each other on - a solid system that provides them with useful information. We know that it might now be the end game, but it moves the debate on and helps clients to trade."
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