LedgerEdge is gearing up to launch its corporate bond trading platform in September, using an algorithm to financially reward good behaviour and punish bad, and use blockchain to give users control of their data.
"The main thing was control of data. On the dealer side there is huge frustration over providing data and then getting their own data sold back to them," said David Nicol, chief executive at LedgerEdge.
The firm, backed by fixed-income trading platform veteran David Rutter, said it has a fix for the other big long-standing problem in fixed income trading – the negative market impact that participants experience following the sharing of trading intentions.
LedgerEdge said it is giving users control of data held on their nodes – using a distributed ledger, or blockchain – to restrict who can see any or part of it and on what basis. This approach, rather than rely on legal techniques, could help unlock liquidity, especially in an all-to-all or request-for-quote trading environment.
An acceleration and expansion of the potential uses of blockchain technology, especially with regard to market infrastructure, is already shaping up to transform the primary markets. But used in this way, it appears to offer a fresh take on the idea that electronic trading should help bondholders, and those searching for bonds, to locate each other.
While collating information on market participants' axes, inventory, client holdings and recent transactions has been attempted before by various venues, they have run into a fundamental hurdle – that allowing the extraction of any of this is a risky decision for those disclosing the information.
Window shopping?
One leading buy-side dealer likens the problem to window shopping, but upon entering the store, the price is suddenly very different to that previously advertised.
"This is about participants making those prices and whether they stand by them. That has to be one of the primary objectives to encourage people to move to a platform like this. If you think about the platforms we've already got – is there a need for another? Only if it brings something different."
The start-up is nearing the completion of the long-running consultation it conducted with market participants and said it has made significant progress on plans to persuade investors and dealers to change the habits of a lifetime and share those trading intentions and data. It plans to introduce a set of financial incentives that encourage behaviour patterns to boost market liquidity and at the same time give users control of their data.
Since it was announced in the third quarter of 2020, LedgerEdge has engaged a working group of 18 sell-side firms and another 21 from the buy-side.
Location, location, location
So can blockchain provide a new way for bondholders and buyers to locate each other – often a tricky task in the relatively fragmented world of fixed income? The algorithm policing participants' behaviour will continued be developed over the next few months.
"The key is that it’s a way of having a conversation around prices, that is direct, you're not sharing that pricing information elsewhere. That could bring, and this is my real hope, more transparency," said the buy-side dealer.
Tim Cook, head of business development at LedgerEdge, said this could be an opportunity to create more trading than currently sees the light of day, especially via asset managers providing data on their holdings, under complete conditionality and control. Of course, strong relationships are paramount in trading. So direct connectivity is possible, it doesn't have to be anonymous, node-to-node; if a bank is happy to share its data with 50 trusted clients then that is fine.
Cook said the first release took place in March, onboarding 30 firms, including large global asset managers, Tier 1 banks and also regional broker-dealers.
Users gets a consolidated picture of axes and latent liquidity, and holding and inventory that doesn't have to have a price attached, but provides market information for future action.