State Street to Launch Automated Bond Trading System

State Street Corp. said it will introduce in the fourth quarter a service to execute fixed-income trades electronically.

Bond Connect, developed with the market data provider Bridge Information Systems and Net Exchange, a software company, is designed to automate fixed-income trading in the U.S. Treasury, corporate, mortgage-backed, and asset-backed markets.

Boston-based State Street said it foresees increasing demand for such service. Less than 1% of 1997's nearly $80 trillion in U.S. fixed-income trades were conducted electronically. By 2000, industry analysts predict, 10% of fixed-income volumes will be.

Bond Connect will increase liquidity in trading, State Street said.

Traditionally, bids to buy and sell bonds move through a series of broker intermediaries. Instead, Bond Connect will anonymously match buy and sell bids.

All bids will be considered collectively-initially, once a day. To promote matches between buy and sell orders, the system will produce a complete listing of orders for traders to peruse.

Buy and sell orders will be matched using a complex algorithm in a process that takes less than 10 minutes. Once the matching is complete, traders will receive electronic notifications of all the resulting executions.

State Street and Bridge said the system should promote trading of bonds that otherwise would not be traded-at least not without the efforts of a sales force..

"A lot of bonds don't get traded because they need a different treatment," said Wallace Johnston, senior vice president of State Street Information Partnerships. "We're hoping to address that."

The most direct competing service is BondNet from Bank of New York. Seventy institutions use BondNet, which has been available since 1995.

"My understanding of Bond Connect's model is that it will have a definite opening window for people to put in bids and offers, and then the window will close," said Thomas A. Price, senior vice president at Bank of New York.

"Our system can run 24 hours a day for bids and offers, which we think best emulates the real bond market, which is about anonymous negotiation," he said.

Lawrence Tabb, senior analyst at the Tower Group, said BondNet "is tailored to the brokerage houses, which use it as a source of liquidity to facilitate transactions."

Bond Connect, on the other hand,"is really looking to be more of a general-purpose product, focused on institutional investors," he said.

Bond Connect will be an addition to State Street's Global Link suite of electronic trading systems, which includes Lattice Trading for equities and FX Connect for foreign currency conversions. All of these are products of State Street Information Partnerships, which was formed in 1996 to develop systems to enhance pre- and post-trade information and automate trade executions.

Net Exchange of Avalon, Calif., will provide Bond Connect's matching engine. Users will gain access to Bond Connect through BridgeStation, Bridge's flagship workstation. Once Bridge assimilates Dow Jones and Telerate it will have 180,000 terminals on desktops worldwide.

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