All-Digital Trading Is a ‘Question of When,’ Tradeweb Says
This article originally appeared on Bloomberg.com here.
Fixed-income traders have been among the slowest to embrace electronic marketplaces. Lee Olesky sees it as only a matter of time until all of them make the switch to the computer screen from the phone.
Interest-rate derivatives in the U.S. are one area where Olesky sees a “big opportunity,” as the total market may currently be only 20% to 25% electronic. The company has also been developing new forms of electronic trading for cash Treasuries, or the portion of that market that has daily turnover, and is focused on penetrating China’s vast government bond market.
Tradeweb’s volume has shown steady increases since it began reporting figures, with November average daily volume across rates, credit, equities and money markets up 22% from a year earlier to $693 billion.
While U.S. Treasuries have largely shifted to electronic trading, fixed-income platforms including Tradeweb are likely to keep growing as investors look to digitize more work, according to Bloomberg Intelligence analyst Paul Gulberg. That’s true even if lower interest rates hurt volatility and trading activity in the near term, Gulberg said.
Tradeweb has seen a rapid increase in the last year in clients interested in so-called session-based trading to offload older Treasury securities, Olesky said. Designed as a way to help large broker-dealers clean up their books, it allows them to dump their orders into Tradeweb’s Sweep system. At a designated time, Tradeweb matches buyers and sellers at a specific price.
The biggest Wall Street banks are using the Sweep system to get better efficiency from their trading desks, according to Olesky. While the company initially offered it in Europe, it’s expanded to 10 products globally and has become one of Tradeweb’s fastest-growing dealer-to-dealer businesses, he said.
“It’s efficiency,” Olesky said. “You don’t need to click the buttons.”
Still, fixed-income clients have been slower to adopt electronic trading than their equities counterparts. More than two decades on from Tradeweb’s founding, just 58% of Treasury trading is facilitated by electronic venues, according to data compiled by Aite Group, while the company itself pointed out in a recent blog post that only 30% of U.S. investment-grade credit trading is electronic.
Refinitiv is the majority owner of the company even after the the April IPO. Blackstone Group Inc. and other large investors currently hold 55% of Refinitiv, which the London Stock Exchange Group Plc has $27 Billion Refinitiv Deal Creates Trading Powerhouse agreed to buy. Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb in providing trading services to the financial industry.
"We have seen the scale game going on,” Olesky said as tech companies, including exchanges, seek advantages. He expects that to continue.
The stock has eight hold ratings and seven buys, and analysts’ average price target implies about an 8.5% gain in the shares over the next 12 months.
Credit Suisse upgraded Tradeweb to the equivalent of buy on Monday, saying the company appears well positioned for strong volume and revenue growth.
“The electronification of fixed-income markets is a significant secular theme that will drive higher trading activity,” while Tradeweb is likely to gain market share, Credit Suisse analyst Ari Ghosh wrote in a research note. There’s also “potential for market data revenue expansion driven by regulatory and industry cost pressures,” and Tradeweb might leverage its “public currency” for strategic M&A, according to Ghosh.