[MKTX] MarketAxess

I first wrote about fixed income trading platforms in 2020. To recap: this market has consolidated into an oligopoly, with MarketAxess, Tradeweb, and Bloomberg at its center. A number of other competitors have emerged over the years, some are still around (Trumid), others have failed (Bondcube, Algomi). But, for the most part, when an asset manager like PIMCO buys Treasuries or corporate bonds from a sell-side dealer or even another buyside participant without picking up the phone, more likely than not they are doing so through one of those 3 platforms.

Tradeweb was founded in 1996 as a consortium, backed by Goldman Sachs, Lehman, Salomon Brothers, that allowed insurance companies, asset managers, hedge funds, and other buyside participants to electronically buy/sell Treasuries from/to broker-dealers. As their position in Treasuries solidified, Tradweb expanded into mortgage-backed securities, derivatives, and especially credit, which latter has been the company’s primary driver of growth over the last 5 years. MarketAxess, funded by 8 dealers and launched as an independent venture 4 years after Tradeweb, made the reverse commute, starting in corporate credit before migrating into Treasuries through its $150mn acquisition of LiquidityEdge in 2019.

The first mover advantages from 20+ years ago carry over to today. MarketAxess claims the most electronic share of corporate credit while Tradeweb and Bloomberg combined have the lion’s share of Treasuries. Bloomberg also has one foot firmly planted in the analog world, with traders still manually interacting with broker-dealers to negotiate transactions through its ubiquitous Instant Messaging service.

While MarketAxess and Tradeweb are each anchored by a different asset class, both play on the same secular theme: fixed income transactions will continue migrating to fully electronic platforms in much the same way equities had decades earlier. When I worked in Fidelity’s corporate bond division from 2006 to 2009, our traders bought and sold bonds through a combination of Instant Messaging and phone calls. This continues to be how most corporate credit and a large minority of Treasuries trade hands.

There is a good reason why manual processing of fixed income transactions has persisted even as stocks have moved completely online. Equities are relatively easy. For the most part, each company has a single class of common stock. The physical exchanges on which they were historically traded offered an easy analog for how they aught to traded in an electronic venue. Bonds are far more complicated. A large enterprise might have any number of bonds outstanding – there are only ~48k stocks worldwide compared to over 500k corporate bonds in the US alone – each with different seniorities, maturities, credit ratings, coupons, and covenants, making it difficult for liquidity to coalesce around any given issue. Whereas exchange-traded stocks change hands continuously, the vast majority of publicly-registered US bonds outstanding in 2018 didn’t trade even once a day and about 16% never traded at all. Treasuries are more amendable to e-trading than corporate bonds, but even the largest and most liquid fixed income market seizes up at times (as in early 2020 and 2022) and liquidity for off-the-run variants (Treasury bonds issued prior to the most recent issue) can be difficult to source. US municipal bonds are even tougher to e-trade than corporates. With ~2mn unique CUSIPs, liquidity is diffused across lots of very small trades.

Notwithstanding these challenges, electronic platforms have intermediated a growing percentage of fixed income transactions over the last 20 years. Buyside firms with atrophying management fees are under pressure to lower costs. Post-GFC capital requirements constrained market making activities by dealers – US primary dealers’ net holdings of debt collapsed by nearly 80% from 2007 to 2013 – and ushered volumes to alternative trading systems. The extent to which electronic trading has succeeded in gaining share corresponds to the degree of complexity and liquidity in each asset class. Around 65% of Treasury trades (80%+ for dealer-to-dealer trades and just over 50% of client-to-dealer trades) are executed electronically compared to ~40%-45% of US high-grade corporates, ~25% of US high-yield, ~5%-10% of emerging markets, and ~10%-15% of municipal bonds. E-trading penetration in all fixed income markets ex. Treasuries is still below the pivotal 50% mark where MarketAxess thinks a critical mass of market participants will compel accelerated adoption. They are particularly bullish about US high-grade, whose share they expect to more than double to 80%-90%.

Bond trading platforms are a conceptually simple business. MarketAxess and Tradeweb collect a toll for pairing buyers and sellers. But given the heterogeneous characteristics of fixed income and the unique needs of different buyers and sellers, the matching process is executed according to different “protocols”. Some of the major ones, which both MKTX and TW offer, include: