Nasdaq, once known as the stock home for young technology companies, is making a bid to become a major player in the electronic trading of fixed-income securities. The move is a logical one for Nasdaq as equity trading becomes increasingly competitive and as exchanges look for new sources of revenue. On July 1, New York–based Nasdaq OMX Group completed its purchase of the eSpeed electronic trading platform for U.S. Treasuries from BGC Partners for approximately $750 million, a huge move that is one of several Nasdaq fixed-income initiatives, which also include the recent launch of the London-based NLX exchange for interest rate futures in Europe.
Eric Noll, Nasdaq executive vice president of transaction services in the U.S. and the U.K., says the exchange is piggybacking on the trend of dealers looking for electronic solutions for fixed-income trading. “Dealers are saying, ‘I have to find a much more effective way to provide liquidity to my customer,” explains Noll, pointing to the increased capital requirements being imposed on banks by new regulations. He adds that the eSpeed acquisition was also driven by Nasdaq’s belief that volume in fixed-income markets will skyrocket once central banks ultimately reverse course in monetary policy and rates rise.
Nasdaq’s move comes at a time when fixed-income markets have been particularly volatile in the wake of Federal Reserve chairman Ben Bernanke’s indications that the Fed could scale back its bond buying program as early as this fall. Though the equity markets have hit new highs since the Fed softened Bernanke’s initial remarks, interest rates have risen, prompting record investor redemptions of bond funds and a selloff of bonds in the market.
“Exchanges clearly recognize the opportunity to gain market share,” says Will Rhode, director of fixed income at Tabb Group, a New York–based trading research firm.
Other exchanges have focused on niches of the fixed-income markets. The Chicago Mercantile Exchange, for example, has launched a swaps clearing platform and new futures contracts. Platforms such as Tradeweb and MarketAxess have also been growing significantly.
Electronic trading doesn’t create liquidity per se, but it’s an efficient way for those wanting to buy and sell to try to find it. “Electronic trading is a liquidity gathering mechanism,” says Nasdaq’s Noll. “It gathers it and puts it in a central location where you can access it.”
Nasdaq’s entry into the market will also increase transparency and visibility of fixed-income prices. The exchange is planning to beef up the dealer-to-dealer eSpeed platform with trading technology underpinning its other offerings that will cut costs for users and offer features such as risk management. In addition, it is hoping to attract to fixed income other member firms that now trade equities and options.
Nasdaq bought eSpeed for its on-the-run U.S. Treasury capabilities, $200 billion of which on average changes hands daily. But the exchange sees the platform as a base on which it can ultimately expand into other fixed-income securities and other markets beyond the U.S.
NLX and eSpeed, as well as existing Nasdaq businesses like its PHLX options trading system and NFX, its U.S. futures operation, are at the core of the exchange’s fixed-income push. In addition, Nasdaq could offer clearing services. It has an ownership stake in LCH.Clearnet, a clearing facility for swaps and other securities, that wants to get a foothold in the U.S. “We’re tying all these different things together,” Noll says, “because we believe in the macro opportunity here and think we can make a meaningful difference to investors.”
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