Alternative trading system BondDesk up for sale

September 1, 2013

Reuters reported this week that the retail focused corporate and municipal bond trading platform BondDesk is up for sale:

Institutional fixed-income trading platform providers Tradeweb and MarketAxess are among three bidders for BondDesk Group LLC in a deal that is expected to be valued up to $200 million, two sources familiar with the situation told Reuters this week.

Disclosure: Thomson Reuters is the majority owner of Tradeweb.

BondDesk was founded in 1999 by Charles Almond who, with Paine Webber (which became UBS), formed the first bond aggregation platform for odd-lot or retail sized trades.

Some big banks bought into BondDesk and eventually the firm had substantial inventory listings and order flow from its owner dealers. The platform worked effectively to distribute dealer inventory to regional broker dealers, smaller shops and investment advisors.

BondDesk was plagued with a series of upper management changes before and after Almond sold the company to private equity firm Advent in 2006. The most promising president seemed to be former Bloomberg superstar Kim Bang, who left BondDesk after one year. Bang had the most interesting vision for the firm that I have heard:

Part of Bang’s original plan when he was hired was to roll-out a technology system for direct retail. To that end, he was successful in implementing Bond Works, which created workstations for advisors and brokers to have direct access to BondDesk’s fixed income wealth management platform.

There are few players in the bond-trading space that have any interest in giving direct access to retail investors. The current BondDesk system is available as a desktop system for brokers and investment advisors and through online brokers. The BondDesk interface that is available through E-Trade and other online systems only seems appropriate for those with significant knowledge of bond trading.

The current BondDesk interface seems like a clone of the bid sheets that dealers used to fax between one another to show their inventory. It’s as if odd-lot trading never took advantage of the data presentation possibilities of the web. The interface does little to inform and educate the customers:

Fidelity’s system, for example, helps investors by providing data on trades that were done recently in the same security. This is somewhat helpful, though interest rates could have moved since the last trade and old trade prices might not guide current prices.

Maybe MarketAxess, Tradeweb or the unnamed third bidder could improve how bonds are presented to retail customers. But the more critical opportunity in this transaction is to tackle the request of the SEC and MSRB to make pre-trade pricing and benchmarks more accessible. It is abundantly clear that regulators want the market to move in this direction. From the WSJ:

As part of a sweeping SEC initiative to boost transparency in the muni market, the agency last summer asked the MSRB to ‘promptly’ ensure retail investors have better access to pretrade pricing information, including benchmark information. The MSRB was asked to post the pricing information on an online web portal, which collects and publishes muni disclosures and trade data.

I’ve argued before that distributing more pre-trade pricing on the MSRB EMMA site is a big improvement. This data also belongs at the point where an investor evaluates bondsand reviews their portfolios. The BondDesk platform is the perfect place for this information to be available. Its new owner could take the lead in the odd-lot market.

Muniland trade volumes have risen dramatically with the recent interest rate sell-off.

On August 21 MSRB’s EMMA reported that 54,161 trades were conducted, of which 83 percent were done in trades of less than $100,000 (oddlot size). The average daily number of trades for August was 46,850.

BondDesk may sell for around $200 million, according to Reuters. This may be a significantly lower price than Advent paid for the company in 2006 (I was paid by several clients of Gerson Lehrman to comment on the transaction at the time).

There has long been pressure on BondDesk and other alternative trading systems from dealers to lower the fees to route transactions through their platform. ATS’s usually act in an agency role; standing as a middleman between the buyer and seller and charging a fee.

BondDesk’s competitors include The Municenter and Bloomberg MBWD, as well as a new entrant operating as a dealer, Muni Axis. Is $200 million a fair price for BondDesk? That will depend on what role it can play in the changing muniland market.

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SUMMARY TRADE DATA FOR LAST 30 DAYS is currently available on BondDesk under Issue Description > Trade History (please see Bond Description Detail page).

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