Some suggested an inherent flaw lay at the heart of the model through which the Citigroup trades were executed, as a strict obligation for mandatory price quotes on market makers is imposed.
The stellar growth in the global daily trade of government bond markets might, from a simple numerical viewpoint, make the probability of a repetition more, rather than less, likely. Highlighting the point, the average daily trading volume of US treasury securities in 2003 - at over $380bn - was double that when eSpeed introduced electronic broking in 1999.
In response to the extraordinary trading incident on 2 August 2004, MTS immediately imposed limits on the execution of transactions within a two-minute period prior to either a €1bn trade on MTS Italy and EuroMTS, and €500m on MTS Deutschland, but lifted the restriction after a month. So-called ‘linked proposals’ functionality was introduced, which complements in-house dealer risk management technology.
You might ask what all the fuss was about, given that the various models of electronic trading that exist are supposed to handle thousands of trades in less time than it takes to blink an eye.
Using EuroMTS and other domestic platforms, Citigroup sold €11.3bn of bonds in just 18 seconds within a two minute period - equivalent to an average day’s trading volume on the platform - hitting as many as 200 separate prices over 11 MTS markets. By buying back some of the bonds and purchasing futures contracts on Eurex, the bank netted a tidy $18.2m (£9.96m), making the fine it incurred seem like a drop in the ocean.
The launch of the euro has helped to turn Europe into the second largest primary bond market behind the US. According to recent figures total gross issuance of euro-denominated bonds this June surged to €252bn from €150bn in May - representing an all-time monthly high.
Within the European electronic fixed-income market there are currently eight major inter-dealer and multi-dealer providers; BrokerTec, eSpeed, Eurex Bonds (German market), MTS Group, Senaf (Spanish market), HDAT (Greek), Bloomberg (BondTrader) and Thomson Financial (TradeWeb). While most of these providers are mainly focused on the B2B market, Bloomberg and Thomson are B2C platforms.
Adding weight
With Euronext and Borsa Italiana succeeding on 1 July in persuading shareholders in Societa per il Mercata dei Titoli di Stato (MTS) to accept its joint offer for 51 per cent of MTS, weight has been added to the MTS product offering, given that two recognised exchanges are behind it. Benefits for issuers and users are likely to accrue, as well as developing MTS as the one-stop shop for fixed-income cash and derivatives.
New products in the shape of indices based on bonds traded on MTS are expected to be developed in consultation with users, as too should correlated derivatives and underlying pairs traded on LIFFE.Connect and IDEM. On MTS, an engine calculates values for 32 indices every 30 seconds from the tradable prices, including governments, inflation-linked and covered bonds. And, there are plans to launch a host of other indices.
Established in 1988 under an initiative of the Bank of Italy and Italian Treasury, MTS, the European Bond Exchange, integrates and operates a group of regulated/organised markets in around 15 countries today. The group offers solutions for both B2B (MTS domestics) and B2C (BondVision) markets, allowing common access solutions for the dealer side.
A single trading platform is provided with local market governance whose prime goal seeks to meet both the needs of issuers and market participants, and to involve their active participation in the organisation of the marketplace.
As a group, MTS trades about €85bn per day (single-counted) including cash and repo, accounts for more than 70 per cent of total turnover in the euro-denominated government cash bond market and has over 500 connections throughout Europe. BondVision, which is the only regulated internet-based multi dealer-to-client market with an ISD European passport, handled a daily volume exceeding €5bn with volumes topping €120bn in the second quarter of 2005.
A host of markets from Austria to Portugal are included: EuroMTS, the benchmark platform listing government bonds of €5bn or more, EuroCredit MTS, and New Euro MTS, as well as four segments in EuroBenchmark Treasury Bills, MTS Quasi Government, EuroMTS Linkers and MTS Cedulas.
A stream of developments in MTS’ markets have taken place lately. One concrete example has been in the new EU member states where a platform was introduced, NewEuroMTS, over a year ago. The costs charged by brokers on EU accession-country bonds typically stand at around €300 per million, while MTS charges €50 per million. A spokesman for MTS in London, says the group expects “fees to align with the rest of the eurozone market in due course.”
With MTS Associated Markets announcing the launch of a primary auction facility for Danish Treasury Bills on MTS Denmark in July, Danmarks Nationalbank’s Government Debt Management department will be able to conduct its Danish T-bill auction electronically. Initially, four Treasury Bill issues will be eligible for trading on MTS Denmark.
Reduced errors
Ove Sten Jensen, head of government debt management at Danmarks Nationalbank says: “The introduction of the primary auction facility on MTS Denmark will enable us and the 12 T-bills primary dealers, to conduct our Treasury Bill auctions in a more efficient and transparent manner. Primary dealers will also benefit through the reduced scope for errors and with significantly faster auction results.”
The development represented an expansion of MTS Group’s activities in the primary market, where a number of issuers have conducted primary auction operations on selected MTS markets via the tap/buy-back functionality. The new MTS primary auction market is expected to be rolled out to other government issuers in due course.
The MTS primary auction was the first system to run on the new technology called TradeImpact. Other markets operated in the MTS stable will migrate to the new technology in coming months, with scheduled completion dates of September 2005 for the money market facility, cash (Q2 2006) and BondVision (Q3 2006). Elsewhere, the MTS technological infrastructure was established in Warsaw in 2004 for the launch of MTS Poland, while MTS Israel is slated to go live in Q1 2006.
The costs of trading (cash and repo) on the MTS systems have come down significantly from levels several years ago. On money markets, several enhancements were made to the repo platform, providing participants with multiple new functionalities.
MTS’ repo tariffs count as one of the lowest around, but this is largely focused on the Italian market.
However, rival electronic fixed-income player, BrokerTec, claims to be the ‘biggest player in Europe’ in the repo market. Dermot Doherty, director of marketing for BrokerTec in London, says: “In relation to our repo market model in Europe for the repo market - outside the Italian market - we estimate [from user feedback] that we probably handle around 90 per cent of the non-Italian repo market one month and under across Europe.”
He claims that people are keen on the BrokerTec platform because it has a link to the central counterparty at London Clearing House/Clearnet.
He says: “For example, you might want to trade all day long in and out of a particular bond, which might involve making 10 sales of €10m of the January ‘15 bund and nine purchases of ?10m of the very same bond (effectively in total €190m).
“If you don’t transact this through a central counterparty (CCP) you end up putting €190m on your balance sheet and make 10 deliveries and nine receipts. Of course, when you net it out in the CCP, it’s similar to what happens in the futures market, you have one ticket of €10m, and that one €10m piece is all that goes on your balance sheet.”
Mr Doherty adds: “The use of BrokerTec plus LCH/Clearnet has resulted in the amount of tickets flowing through the system declining by nearly two-thirds, but also the balance sheet netting is a huge advantage for the big US and European investment banks.”
On the interdealer markets, both sides to a transaction on MTS pay an average of €2-€3 per million for cash in the Italian market; for euro cash the tariff is generally between €5 and €8, while on BondVision only the dealer side pays. That said, these are average prices and it should be borne in mind that the tariff is dependent on the type of product, the volume traded and in which market.
MTS claims it is one of the cheapest in the market for trading cash euro-denominated government bonds. Brokers typically still charge around €10-€15 per million, while competitors of MTS charge €5-?7 per million. In the case of lCAP’s BrokerTec platform, the tariff is within the €5-€7 euro range, however, but it is only the aggressor that pays.
On MTS’ InterDealer model costs are borne by end users by the way of a connection fee, membership and an obligation to market making. In relation to BondVision, however, clients trade free of charge.
eSpeed Inc., which is a standard for electronic bond trading in the US treasury market, also has European operations. Paul Saltzman, eSpeed’s chief operating officer and former executive vice president and general counsel of the Bond Market Association, says in relation to tariffs: “We offer our customers very tailored pricing solutions, that range anywhere from straight variable commissions to fixed commission arrangements. Those are proprietary and customised to each user.”
