Platform bubbles represent a new vestige of competitive digital markets. A couple of years back if you weren’t working on an SEF, lots of people inclined to believe you were somehow blindly incapable of spotting the future. Of course, those blindly incapable of foretelling the next year or three were mostly those fixated with the idea that SEFs were a guaranteed winning proposition despite the fact that in addition to the quasi-incumbent IDBs, a veritable cornucopia of folks equivalent to the population of a small French city were all assiduously beavering away building some form of post OTC swap-centric business.
We all know the post OTC market will be enormous (or do we? - it’s terrifying how few can make the rational step that more open platforms plus a vestige of transparency will make for a larger market). However, timing is everything and nowhere is this more true than market platforms themselves. Thus launching a swap platform in an age of yield curves steamrollered flat by Quantitative Easing has had the concomitant effect of leaving those ‘sure thing’ SEFs looking more like baddies on cliff edges hanging on by their fingernails at the end of an Alastair MacLean thriller when, indeed, their world domination strategy has gone curiously awry due to some relatively obvious factor they somehow seem to have overlooked.
Lots of SEFs will thus probably not survive 2015 in their current form.
The other curious thing about this is how the crowd effect is so prevalent in markets. Thus where there are blatantly obvious (to me anyway) opportunities, investors seem reluctant to tread while groupthink abounds as a vast swathe of supposed bourse brainiacs indulge in the mountain top lemming shuffle after the latest ‘sure thing’ platform market.
That brings us neatly to that preference of gentlemen - bonds. Nowadays, QE has made bonds much more democratic - most everybody is locked into a low yield death hug. Which I would term a bubble. With western yield curves flatter than Lake Lucerne on a perfect summer’s day, every man, and his dog of a corporate entity, can borrow cheap money for barely a few hundred basis points above LIBOR, based upon ratings which would make classic ‘junk bonds’ blush.
Call me old fashioned but when I assess a risk or two, I do feel there is some difference to be discerned in terms of, say, vast AAA rock steady edifices (no, not banks, silly) rippling with assets and corporate cash flow, compared to the, at best acne-ridden balance sheets of the junk stuff. Bond markets currently beg to differ with my traditionalism.
Even less encouraging is how so many sheep, er, industry executives, are currently pursuing the mantra that the bond market is ripe for reform. Well that bit is true, their blind faith in imminent change at the top of a mega bubble is, however, distressing. The platform breakthrough will come some time after the Bond market performs the sort of half somersault with distressingly bloody ending equivalent to a whale shot out of a circus cannon above a supermarket car park. More worrying still, amongst the arriviste new platforms of the bond world there appears to be a blithe misconception that when bond prices go south like a nun in mine shaft attached to an anvil, the average bond trader will be sending his liquidity all of a sudden to new venues. Rather the average bond trader will probably be applying for unemployment benefit while their few colleagues still left within banks and brokers will have little incentive to move their flow lest the process of disturbing the status quo alerts management’s attention to the notion that he who is not paralysed with fear has clearly insufficient workload to justify their position on the payroll.
Great reforms and exciting new trading patterns will be the epicentre of bond trading - in about half a market cycle. Meanwhile, those who want to excel at market trivia should be memorising the names of platforms which currently reckon they are the brave new world of bond trading. By the time prices stabilise as part of a more normal yield curve, most every trader will have forgotten they ever existed.
Patrick L Young advises investors & adds pith to the exchange world daily with his newsletter Exchange Invest (Http://ExchangeInvest.com).