Strength-to-Strength Online Trading

The buzzword in the online trading of bonds is All-to-All, but the better phrase is Strength-to-Strength because that is how the industry has been performing across the spectrum lately. A Greenwich Associates report notes that over one third of bond trading is now done online, and almost half of all investors now trade at least some of their fixed income electronically.

The momentum is increasing: filings from one publicly listed competitor show 5 year top-line CAGRs of ~17% that have accelerated in the last year to more than 21%! Operating margins are high at around 50% and have also been increasing with the benefits of scale.

What will the next phase be? Competition should be intense because the market remains fragmented; no players control more than 20% of the market. And it is estimated that every point of market share is worth $25-35mm of  incremental revenue.

Given the stakes, the network effects and the economies of scale, the strongest platforms are expanding their product sets to the less liquid and higher margin sectors, like leveraged loans. They are also racing to consolidate as many client sets as possible since, in a real sense, much of the market is still a land-grab. And since scale economies will become more pronounced over time, we are guessing that the next billion in revenue will generate more than $500 million in incremental operating margin.

That is the nature of Strength-to-Strength trading.