Market Structure Update: Data, DeFi and Corporate Bond Trading
Q4 2021
Even as fixed-income trading on electronic trading platforms continues to gain speed, a whole new world of decentralized finance, or DeFi, is opening. Taking the lead here is LedgerEdge, which is about to launch the first institutional corporate bond trading platform powered by distributed ledger technology (DLT) in the U.S. and U.K.
“We are using distributed ledger technology to give users ownership and control of their data, trade on a point-to-point basis and achieve fundamentally better execution,” says David Nicol, co-founder and CEO of LedgerEdge.
Adds Michelle Neal, U.S. CEO, LedgerEdge, “We’re focused on being an institutional-grade regulated ecosystem for trading.”
The two spoke with Kevin McPartland, Head of Research in the Market Structure & Technology group at Coalition Greenwich, at an October 20, 2021 webinar on “Data, DeFi and Corporate Bond Trading.”
LedgerEdge will get off the mark by launching a multilateral trading facility (MTF) in the U.K. “imminently.” This will be followed by a U.S. alternative trading system (ATS) in March 2022, and a European MTF later in 2022.
Improving the Way Bonds Are Traded
Undoubtedly, electronic trading platforms have innovated greatly to bring the corporate bond market into the digital age over the past decade. Nevertheless, LedgerEdge’s founder David E. Rutter and co-founder David Nicol saw “a real opportunity to improve the way bonds are traded today.” “The market has come a long way. But we think there's a lot of innovation and great experience to deliver,” says David Nicol.
LedgerEdge began by establishing working groups with 18 sell-side and 21 buy-side firms in the U.K. last year—a similar exercise is underway in the U.S. to cover regional nuances—to identify pain points in the bond markets before building out the platform this year.
Addressing Liquidity Needs and Data Leakage
For one, it found that discovering liquidity is still a huge challenge for corporate bond traders, especially for large trades of over $2 million and illiquid securities outside the top 2,000 most-quoted securities.
“It's still largely a market with lots of different liquidity pools, and the challenge we heard from traders was that you have to find the right pool to execute a particular order,” says David Nicol. So, market participants are demanding improved communication of accurate liquidity information even before the trade is placed in the market.
This leads to the second big pain point: executing trades without data leakage. “For larger-size, complex trades and illiquid orders, you want to limit data leakage. Ideally, you’d like to find the right pocket of liquidity to deploy the order before you even hit the market,” he explains.
Data Ownership and Control
Data ownership and control is a key concern on the sell side, too, points out Michelle Neal, having experienced that end of the market.
Neal began her career as an analyst at MFS Investment Management in Boston and then spent 18 years in the U.K. working with Nomura, Deutsche Bank and Royal Bank of Scotland across the sales, electronic trading and market structure businesses. Prior to joining LedgerEdge this July, she was heading U.S. Fixed Income Currencies and Commodities at RBC Capital Markets.
She says, “Having sat in the seat and managed both my data costs and the consideration of how to evolve our business with more intelligence, I think banks and clients alike despair at some of the models out there.”
Excitement in the DeFi Space
Will this bring DeFi, which has been light years away from institutional capital markets, into the mainstream? Certainly, David Nicol believes, that’s the only way to realise DeFi’s full potential.
He says, “There's so much excitement in the DeFi space as a whole. What's different about the space we're talking about is that this is regulated and institutional-grade. I think the only way that any of these new and innovative approaches are going to reach their full potential is by entering into this in a fully regulated and institutional-grade way.”