Panel: Uptime Still King

LONDON—Technological innovation in the European fixed-income e-trading market has failed to dethrone uptime—the ability to continually deliver streaming prices to clients from major trading platforms—as the main priority for major investment banks, according to market participants.

"As more people become reliant on e-platforms, the more important it is for us to switch them on," says Kevin Arnold, managing director, head of European government bonds trading at Deutsche Bank. "We spend a lot of our time ensuring that our systems are not down."

Arnold told delegates at the Securities Industry and Financial Markets Association's (Sifma's) second annual European fixed-income e-trading conference in London last week that half of the bank's fixed-income trades would be done electronically this year.

The race to differentiate banks' e-trading platforms has become increasingly competitive as fixed-income pricing has become standardized, Arnold says.

Dealers can distinguish themselves with familiarity and with the ability to integrate different asset classes in product delivery, says Arnold. "People do not want a multitude of platforms on their screen: They want one platform to produce a range of functions," he says.

It is also important to engineer different ways into the platform with click-and-trade functions and links to Microsoft Excel spreadsheets, he adds.

In a recently published European fixed-income survey, Sifma researchers report that the sell side, the buy side and trading platforms expect e-trading, as a percentage of volumes, to grow by as much as 38 percent this year.

The survey, which sampled the views of major sell-side firms and trading platforms along with 302 buy-side firms with €23.5 trillion ($30.6 trillion) in assets under management, reveals that sell-side firms report a 32 percent growth in volumes of e-trading as a percentage of the total from 2005 to 2006.

TradeWeb, an electronic multi-dealer trading platform, reports that the total value of all transactions on its platform increased from $42.8 million in 2005 to $51 trillion in 2006. The Sifma survey predicts that future product volume growth will come from less established products, such as interest rate swaps and credit default swaps.

The vast majority of electronic trades in the European fixed-income market are currently low-value transactions on vanilla products, say the report's authors.

"Any client who deals 100 percent electronically is not a valuable customer," says Garry Monaghan, head of euro swaps and government bond trading at BNP Paribas. "We are dealing with very tight spreads in the government bond market."

However, an increasing awareness of how e-trading can be used as a valuable marketing tool to foster client relationships and sell more lucrative products is a driving force behind investment in e-trading technology.

"Electronic trading allows us to segment the relationship with the client and understand the relationship more intelligently," says James Rice, director of global debt, government bond trading at Merrill Lynch.

E-business was a "low-cost-of-flight" service that can be used to give leverage to a bank's business even if profit margins on transactions are close to zero, says Lionel Gibert, head of credit trading at Société Générale.

"We can afford to offer this low-cost service as the wider importance to our business cancels out the low margins obtained on products," he says. "E-business is also important in resolving problems such as best execution under the Markets in Financial Instruments Directive (Mifid) and as a means of resolving cost issues."