Fixed Income Focus | Michael Krogmann Integrity counts
In a market of proliferating electronic trading venues, Michael Krogmann, EVP at Deutsche Börse AG, explains why they may have a platform in Xetra Bonds that will stay the course.
Why do you think bond trading has to shift from OTC to regulated markets? Bonds as an asset class have become much more popular with investors and they have significantly gained importance on a macro-economical level. As a result of the financial crisis, governments and companies alike were forced to look for re-financing alternatives. This continuously growing prominence has not been reflected by the traditional bond trading places. Telephone- or “request for quote”-based trading simply lacks the transparency and the efficiency an asset class this important requires. After all, investors are confronted with unclear prices and high risks. Thus, transparency and market integrity in bond trading are absolutely necessary. In two years’ time, it will be mandatory anyway, due to the transparency requirements which will come into effect with the implementation of MiFID II. In addition, CRD IV (Basel III) increases capital requirements for dealers. Hence inventory
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based liquidity provision becomes more expensive – another reason for a shift to organised electronic markets.
How would you try to convince market participants to change their traditionally OTC-bound bond trading activity?
The same way you always convince rational people: by showing them a superior alternative, by making them a better offer. Deutsche Börse has done exactly this by introducing Xetra Bonds. This new product segment on Xetra aims to provide investors with exactly the market quality and standard for bond trading they expect – and rightfully demand – from equity markets. In OTC trading, market participants have to request quotes from several banks to assess whether they get competitive pricing. In bonds, they have no access to continuous real-time pricing. Xetra Bonds, however, offers real-time price discovery via an open order book with a depth of no less than 5, meaning the five best bid respective
ask prices will be depicted. Therefore, investors are able to enjoy best execution of their bond trades exactly as they do when trading equities or ETFs. This way, they can be sure they are getting a competitive price, especially since they trade under the same conditions as every other market participant. Xetra Bonds provides every market participant with a fair, identical and anonymous access, as required for regulated markets. In a nutshell, this is our USP
– we offer more transparent and fair pricing than any OTC trading facility, thus promoting a market integrity bond trading has not experienced before.
A better offer usually means a better price. In this respect, why is your new offering superior to other recently established platforms? There are several factors which set our new offering apart from those of our competitors. Let us talk transaction costs first. Explicit transaction costs in bonds trading on Xetra are very low due to a highly attractive pricing model and the efficiency
Best Execution | Spring 2013
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