A race is on to bring high-yield bond trading to the Internet.
Trading Edge Inc. of Santa Monica, Calif., said it plans to start up its system for trading the securities on April 15-about two weeks after New York-based Limitrader plans to begin a test run.
Both companies aim to let investors and dealers circumvent the traditional method of calling dealers to get price quotes on the securities known as junk bonds.
Trading Edge's BondLink and Limitrader's LIMITrader.com would let participants in the $550 billion high-yield market use the Internet to scan bid and offer prices in real time and to trade anonymously.
"We would be very happy" with a 1% to 2% share of the market over the next year, said Rob Stoner, director of sales at Limitrader.
High-yield bond trading is one of the last sectors of the fixed-income market to go on-line.
Last year, for example, New York-based TradeWeb LLC traded $170 billion worth of other types of securities, including U.S. Treasury bills, notes, bonds, and "strips"-securities that have been separated into tradeable pieces paying interest or principal. Its 500 users include Wall Street dealers like Credit Suisse First Boston, Goldman, Sachs & Co., and Lehman Brothers.
Development of Internet trading in junk bonds has been slowed by the market's relative illiquidity.
"The issues are just not homogeneous," said Andy Nybo, director of research at the Bond Market Association in New York. "Every high-yield bond has a story behind it. It's not conducive to a screen-based system, where you look at a security and say, 'Yes, I want to buy it.'"
He noted that even junk issues from the same company may differ in structure and therefore are not interchangeable.
"The on-line systems will work for the more liquid names, say the Level 3s," said one high-yield trader at a Midwest brokerage, referring to Level 3 Communications Inc., one of the largest issuers of high-yield debt this decade.
He said his shop would not be signing up for Internet trading. "It still won't work on the less liquid names we trade. Some bonds have a (wide) bid- asked spread and will go a couple of weeks without a trade."
Developers of the Internet systems contend their products would increase activity in the market.
"Although some dealers believe electronic trading systems fragment markets, my view is that over time they actually create and add to liquidity," said Murray L. Finebaum, chairman and chief executive officer of Trading Edge.
Almost 180 investment institutions have signed up to use BondLink, Mr. Finebaum said. The company expects to have more than 300 trading terminals in use when the system goes live.
About 50 participants-about 80% of them investors, the rest dealers-have signed up to test Limitrader this month, Mr. Stoner said.
Neither company plans to charge monthly use or licensing fees. They will get a small fee for each transaction, in the same way traditional dealers would. Limitrader, for example, is to get $500 to $1,250 for every $1 million block of bonds traded on its system.
