Ex-Goldman Exec Pushes ’70s Fix for Bond Market’s Big Problem

(Bloomberg) -- Chris White wants to drag corporate-bond trading into the 21st century. Or at least the late 20th century.

With a new platform called BondCliQ, White, who made his name at Goldman Sachs as a bond-trading technology expert, hopes to fix a seemingly intractable problem with corporate bonds: that even in the digital age, investors are often flying blind. That’s because most big trades still get done by haggling with a handful of big banks.

His ’70s era solution: a centralized feed with real-time price quotes, akin to the one adopted by the U.S. stock market decades ago. The challenge is getting the establishment to go along. Wall Street dealers make a lot of money trading bonds partly because this arena is far less transparent than equities.

White, who’s been working on the project for over a year, is betting he can sell those same dealers on the idea they have more to gain by submitting bids and offers to his startup.

“Market makers are malnourished around data,” said the 43-year-old White, who says BondCliQ will officially go live in September. “Our big, overarching hope is that we can improve liquidity in the marketplace through an overall improvement in market-data quality.”

Historic Parallels

White says four of the top 10 U.S. corporate-bond underwriters have agreed to provide quotes on the platform, though he declined to say which ones. Two stock-market veterans, including former NYSE CEO Duncan Niederauer, have also put money into the startup. They emphasize what BondCliQ is doing has historical parallels to Nasdaq, which started out as just a bulletin board for stock quotes posted by dealers before evolving into an exchange giant.

The venture is still far from a sure thing. White has faced delays in getting the company off the ground, telling Business Insider last year he planned to have BondCliQ up and running by last fall. And the problem BondCliQ is trying to solve -- the debt market’s lack of transparency -- has been hugely profitable for the biggest dealers. White needs buy-in from those very firms to succeed.

These days, when fund managers want to buy or sell a corporate bond, they have two choices. If the trade isn’t too big, they can break it up on electronic markets and hope prices don’t move too much as the orders are executed.

However, for deals over $2 million or so, investors have little choice but to call up dealers to find out who’s willing to trade and at what markup. And if you want to unload an illiquid bond or need to do a particularly large trade, it can take upwards of a week to complete. (Though many would say post-crisis bank regulations are as much of a culprit.)

History Lesson

Today, about 80 percent of U.S. bond deals are still done by phone or over chat. There aren’t any exchanges and everything is negotiated, which gives dealers the upper hand when it comes to where the market is for a given bond. It’s a situation that has enabled the biggest firms, like JPMorgan and Goldman Sachs, to keep a stranglehold on the market.

And it’s not like they have much incentive (or even the legal obligation) to change. The bond market is littered with startups that have tried -- and failed -- to loosen Wall Street’s grip on bond trading and make it more efficient. Names like BondBook, Bond Connect, BondGlobe, BondHub, BondLink and XBond. Even GSessions, the online platform White developed at Goldman, flopped.

“Data is really the big focus in the bond market now,” said Kevin McPartland, head of market-structure research at Greenwich Associates. Nevertheless, “we can’t minimize the importance of the big dealers in the market and their pricing and everything that comes along with it.”

(Bloomberg LP, the parent of Bloomberg News, competes with BondCliQ in providing bond-price information.)

Too Much

White and his backers are undaunted. Prior attempts to modernize the corporate-bond market failed because they were trying to change too much at once, without first tackling the fundamental issue of transparency, according to Eric Noll, a former top Nasdaq executive who’s also invested in BondCliQ.

“When many people look at fixed income -- say it all should be electronic, it should be an exchange -- they try to solve all of the market at once,’’ Noll said. “Every time somebody has tried to do that, it has failed.’’

Both Niederauer and Noll say Nasdaq serves as a model. From its humble beginnings in 1971 as a place where dealers could electronically quote bids and offers for stocks too tiny for NYSE to bother with (but not trade them), Nasdaq ultimately grew to become one of the biggest markets in the world. Along the way, trading exploded.

Before Nasdaq, “you didn’t know what the real price was on a Nasdaq stock because there was no ability to look, no pre-trade transparency,” Noll said. “What it did was really allow dealers to compete with one another.”

Imperfect Analogy

The analogy isn’t perfect of course. Much of the surge in volume occurred after Congress mandated in 1975 that all stock prices be publicly displayed on a central feed. That’s not the case for corporate bonds and BondCliQ’s feed will only be visible to its own participants. What’s more, the automated quote system was created by the National Association of Securities Dealers (hence the Nasdaq acronym) with built-in buy-in from its member firms.

White, who left Goldman in 2015, sees plenty of opportunity. One reason is that dealers themselves often don’t have a full picture of supply and demand, and hesitate when they don’t “have enough information to make the market.”

BondCliQ could change that because it will enable all participants to see the same quotes, including size, at the same time, he said. To attract dealers and encourage them to provide bids and offers on the platform, BondCliQ employs a revenue-sharing model where dealers split 80 percent of the revenue, which the firm generates by charging money managers, bond-trading platforms and analytics providers for access to the data feed.

Ranking System

A ranking system determines how the pie is split. The most consistent and competitive the quotes, the bigger the cut of the profits.

“We can create a back-of-a-baseball-card type of experience, where customers can know how well an individual trader has performed over time,” he said.

Currently, a total of 15 dealers are contributing 15,000 quotes each day for roughly 3,500 individual bonds on a provisional basis, White said. For now, they’re limited to those issued by banks and financial firms. About a third of the bonds have quotes from multiple dealers.

At the moment, there’s no way for BondCliQ to track how many of those quotes will actually turn into executed trades. And whether the platform will spur a marked improvement in turnover and transparency is an open question.

Niederauer says White has history on his side.

“One of the key tenets of the modern stock market is a pricing mechanism that people trust,” Niederauer said. “It has exponentially increased liquidity.”

©2018 Bloomberg L.P.

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