With MiFID II imposing a whole new set of requirements to the non-equity world, the financial industry has started to collaborate in order to find ad-hoc solutions, ranging from authority-solicited endeavoors, such as the French Cassiopeia, to common initiatives in agreeing over technical standards. For example, the one reported by the Financial Times in the beginning of last December that sees the involvement of thirteen leading broker-dealers cutting IT costs. But solutions on the market are already available.

Established in 2000 and equally owned by the two biggest Italian banks (UniCredit and Banca IMI of Intesa Sanpaolo), EuroTLX has become a leading Multilateral Trading Facility (MTF) in Europe over the years for the etrading of fixed income securities in retail-size and investment products distributed to retail clients. In the European dealer-to-client electronic bond sector, EuroTLX has a one percent market share in the government   bonds segment, a share that increases by up to 11 percent in the case of non-government bonds, according to research made by Celent in October 2010.

In real time
The EuroTLX microstructure is unique in the European fixed income scenario, being order-driven with the presence of at least one liquidity provider for each of the 4,200 traded financial instruments, and is characterised by a complete real time pre and post-trade transparency on all securities.

“We have been running fixed-income markets for more than ten years now, electronically trading bonds just as you would with equities”, says Luigi Campa, Head of Strategy at EuroTLX. The words ‘fixed income’ have to be seen in the widest possible meaning: Government bonds from 25 different countries, supranational bonds, emerging markets, corporate and financial bonds, ABS, covered bonds, and other debt instruments. As for currencies, about 90 percent of the securities on EuroTLX are traded in the euro, with 15 other currencies accounting for the remaining 10 percent.

“Liquidity and transparency are probably the two most overworked terms in the financial markets industry, but in our case these are proven by hard facts: Every day we register an average of 13,000 single-counted trades, with a daily turnover of more than €330m. These trades all run on a central limit order book, with a full pre-trade transparency on a five-level depth, with price and time priority, anonymous and continuous, and with complete post-trade transparency”, Luigi Campa says.

As for post-trading, this is entirely “straight-through” processing, with the market automatically sending all settlement instructions to the CSD, ICSDs or CCPs in real time and with a daily reconciliation report provided to each market member. The CCP feature, in particular, is being more and more appreciated by market participants: “The introduction of a central counterparty surely adds to the optimisation of post-trading processes, also guaranteeing anonymity in trading and lowering the tied-up capital required by regulators”, Luigi Campa notes.

Expanding the EU bond offer
EuroTLX does not plan to solely concentrate on post-trading. The aim for 2012 is to enhance the market’s fixed income offering for institutional and retail aggregators, increasing the current “EU bond selection” to circa 2,000 fixed income securities. By doing this, EuroTLX has identified a set of criteria that should permit it to create a pool of instruments appealing to a wide range of players on a European level, both from the client servicing side as well as the market making side, these include:
- Issue/issuer with investment grade rating;
- total amount issued higher than €500m;
- traded on a regulated exchange;
- trades in all major currencies;
- instrument typologies include: government bonds, corporate amd financials, covered bonds, SAS (sovereign, agency & supranational), emerging markets;
- minimum trading lot of €1,000 (or USD or GBP) and multiples.

“We currently have around 1,600 fixed income securities that are already fitting these criteria, on which the number of trades in 2011 has been 1.4 million for a total turnover of about €46bn”, Luigi Campa says. “This selection is going to increase in the upcoming months thanks to the close collaboration with the 20 liquidity providers that are active on our market”, a list that includes Banca IMI, BNL-BNP Paribas, Deutsche Bank, Exane, Macquarie, Mediobanca, Method Investment, Morgan Stanley, Monte dei Paschi Capital Services, UBS and UniCredit.

A mixed microstructure
Every single instrument traded on the market has to have at least one liquidity provider. “The decision to list a security is actually taken not by EuroTLX, which has more a suggesting role, but by the liquidity provider”, Luigi Campa comments. “The liquidity provider is definitely a key figure on EuroTLX.”

The liquidity provider has the obligation to quote for a minimum size all through the trading session, usually €100,000 in the case of government bonds and €50,000 for corporate and financial bonds. “About 78 percent of the EU bond selection instruments have at least two market makers, and in some cases even six, competing on the book with their firm quotes”, Luigi Campa states. These percentages may vary according to the asset class, ranging from 70 percent in the case of financial bonds to up to 90 percent in the case of SAS and emerging markets.

Liquidity providers do not have any spread obligations. They compete anonymously on the book, and since the market microstructure is mixed, orders coming from the agency flow may actually improve the quality of market prices. As a result of the market-mixed microstructure, prices on EuroTLX, where comparable, have been equal or better than 74 percent of the time during 2011. “Another metric that we closely monitor is what we call the cross ratio”, states Luigi Campa. “By that, we mean the percentage of trades executed between agency order flows, i.e. without having as counterparty the liquidity provider”.

In 2011 the cross ratio has been 51 percent, “a figure that shows how well-balanced the market flows are” Luigi Campa comments, despite the cross ratio strongly differing from one instrument type to the other. On government bonds, for example, the importance of the liquidity provider’s role lowers the ratio down to 26 percent; whilst on structured notes placed throughout Italian domestic networks – securities not included in the EU bond selection – the cross ratio is even higher than 70 percent, “a result which we might find as counter-intuitive, but the banking bonds segment is the one with the highest trading activity done by the broker community”.

As for the available liquidity on the book – meaning the trading proposals in bid and in ask – the EU bond selection has registered a daily average of €300,000, with buys of up to €2.8m and sales of up to €1.8m.

Going forward
In Italy, especially in the fixed income market, the effects of MiFID’s first release have translated into an increase of competition amongst trading venues (regulated exchanges, MTFs, systematic internalisers). “Best execution rules did not affect that much the equity space”, notes Luigi Campa, “but they surely did for bonds. In the past four years we managed to increase our market share from below 15 percent to 40 percent, and in some days even more than 50 percent, thanks to the development of smart order routers that are awarding those venues with the best conditions”.

Leveraging on its consolidated market share in Italy, EuroTLX is now looking to grow outside of its home market, thus shifting slightly the core business from purely retail-based flows to an institutional level, but still remaining focused on retail sizes. “We do not see us as competitors of MarketAxess, Tradeweb or BondVision”, Luigi Campa says. “Even though worlds that in the past were clearly separated are now beginning to converge”.

The experience gained from running electronic bond markets for over ten years and the track-record delivered, even in the most adverse historical moments, set out the basis on which to leverage EuroTLX’s vision of a truly European bond market. “Why invest in developing in-house solutions when you already have an efficient and cost-effective trading venue at your disposal?”, asks Luigi Campa.