Visible Markets claims it is going to corner the online bond trading industry and diminish the role of traditional bond salespeople.
Brian Robertson, the Boston start-up's chief executive, said the company is poised to dominate online trading in mortgage-backed, asset-backed, and corporate bonds because it is one of the first movers in this industry, with a sizeable customer base and an easy-to-use system.
The company expects to announce within the next few days that it has raised more than $12 million in a new venture capital round. That's on top of the $2 million of his own money that Mr. Robertson contributed in December, $1 million he added in February, and $9 million the company raised in April.
Mr. Robertson predicts that in the next few years traditional sales of mortgage- and asset-backed and high-grade corporate bonds will drop 25% to 33% as salespeople switch from the phone to Visible Markets for speed and convenience. He likened his company to TradeWeb, a marketplace started by Wall Street dealers in 1998 that has focused on government securities and put many Treasury bond salespeople out of work.
But Wall Street dealers say that online ventures will only help their salespeople. Tom Marano, mortgage trading manager at Bear Stearns & Co., said his salespeople "have been able to leverage every step of the technology made available over the last 15 years. It'll be an enhancement, another tool in their arsenal."
Mr. Robertson said that traders like his marketplace because it has helped them unload hard-to-sell bonds. Mr. Robertson said he knew one trader who sold in one day on Visible Markets a bond that had been on his books for seven weeks.
Visible Markets was founded last November by Mr. Robertson, formerly of Amazon.com, and Sam Choi, a former vice president in the mortgage trading group at Lehman Brothers. The system started to handle trades of mortgage-backed and asset-backed securities in June and added corporate bonds in August.
Mr. Robertson said that over the last few years, the bond market has shifted from a centralized, dealer-dominated industry to a fragmented, decentralized market composed of about 500 institutional investors.
Until 1998 dealers held close to 80% of the world's mortgage-backed, asset-backed and high-grade corporate securities, he said. But after suffering huge losses in the wake of the Russian debt crisis and the collapse of Long-Term Capital Management, dealers have reduced the amount of bonds on their books and now focus on selling new issues. Dealers have been willing to dedicate only a fraction of the capital they once did to secondary trading, Mr. Robertson said.
After Wall Street stampeded out, large institutional investors scooped up corporate, asset-backed and mortgage-backed securities. Portfolio managers now hold as least 80% of these bonds, he said.
The problem, Mr. Robertson said, is that investors have had a hard time trading their securities, as they can only do so through Wall Street, and the dealers are not giving them the bids that they want.
He said that Visible Markets can help dealers boost distribution. Dealers typically market new issues to 50 to 75 investors, but Visible Markets can help them reach several hundred and at a lower cost because the marketing is done by a computer network.
Mr. Robertson said his service enables investors to see one another's bids for bonds, so they no longer have to get this information from dealers. That way dealers can no longer exploit the disparity of information by, say, buying a bond cheap from one investor and selling it at a marked-up price to another. Mr. Robertson said the increased transparency will gives investors confidence in their decision-making that they would not otherwise have.
Another selling point for Visible Markets is the ability to trade bonds anonymously, which Mr. Robertson said is intended to protect investors from having their strategies revealed to the rest of the market.