The digital bond trading revolution
It's no secret that the fintech sector is booming. Here, Startups Magazine speaks to David Nicol, CEO and Co-founder of fintech startup, LedgerEdge, which is providing a new ecosystem for the exchange of data and assets in the corporate bond market, on the challenges of launching a new firm in this sector.
What challenges are you setting out to resolve in the corporate bond market?
The secondary market for corporate bonds is an important market, but participants still struggle with the core problems of illiquidity and data, which are interrelated. Corporate credit plays a critical role in today’s portfolios, but the systems and processes that support the market need to move into the digital age.
All market participants encounter the challenges of illiquidity and a broken data market. Buyers and sellers don’t meet or don’t cross the spread due to a lack of high confidence pricing data. Fewer trades means less quality data, and those with a price conviction don’t share those insights with the rest of the market to prevent prices moving against them. Market participants need fundamentally different ways to engage and a functioning market for data that incentivises value additive activity.
Latent liquidity in the corporate bond market is massive. Buyers and sellers of corporate bonds are stuck in separate liquidity pools or meet but don’t cross the spread. To find a workable mid-price and trade with conviction, they require quality data. For many trades this insight may be held on one side of the trade, or maybe with a third party. But none of that data is shared because it only helps other competitors in the market. In an illiquid market, any small insight is made more valuable.
While electronic platform growth shows important progress, some protocols are blunt tools that leak data. Voice broking remains heavily used, but those conversations require additional time to get the trade done and leak data in different ways. 82% of market participants think that trades over $5mm are hard to fill, and portfolio trading grew by 141% in 2019 (and further in 2020). These trends show that the market is looking to do more business but the right tools aren’t available. The underlying problem is a lack of high quality data for price makers to act at volume and with conviction.
The growing data revenues from market infrastructure shows that data is more valuable than ever, but the rise of new data models and ‘take back the market’ approaches like MEMX show that the market for data is broken. Today, data - mainly orders, trades, and searches - is aggregated by a central market operator, who sells that data as a feed to all users. With the illiquidity of the market and the fact that each data point is shared with the market as a whole, there is no incentive to share anything with the market (further hurting liquidity).
These are mutually reinforcing problems, and they are getting worse, not better. The ‘Why’ for LedgerEdge is the fact that this market is systemically important, supporting growing ETFs, and forms a pillar of pension funds all over the world. It can be better. The technology is available to make it more functional, more resilient, and ready for the next stress test.
How are you tackling these challenges?
LedgerEdge is a new ecosystem for the exchange of data and assets, created to address the most significant challenges in the corporate bond market. Our aim is to deliver a fundamentally better way to engage with the market, and allow participants to find data, share data, and execute trades with fundamentally better results.
We are working with the industry to build a ground-breaking solution using technologies that until recently have been in research mode but are now tested and ready for institutional grade deployment. These include enterprise blockchain technology, secure enclave computing and Artificial Intelligence (AI).
By harnessing the power of blockchain, we are able to remove the need for a central point of data control and aggregation, and give individual users control over how they interact with the ecosystem, enabling them to find liquidity and identify prices without leaking vital information.
As a startup, how do you intend to take on the more established incumbent players in the space?
As with any new venture, it’s all about timing, approach, and vision.
We have a moment of opportunity as the market pushes the limits of currently available solutions. Blockchain technology is now mature enough to support our vision. Across the market, users are more comfortable with electronic trading every day, and more eager to trade in a market with better data and more intelligent connectivity.
We are taking a sensible approach, building a regulated market and collaborating with all parts of the industry. As a startup, we can and will move quickly, but we are moving with our customers and partners at every step. We are also taking the time to integrate with important client-side systems to make setup and use as easy as possible.
While we are careful to work with the market, we are also executing on a vision of a fundamentally different way of engaging with the market. We have an ambitious goal, which we have broken down into logical steps. Our challenge - and our advantage - is to execute on a powerful vision and help the market understand a new way of working, while making the adoption of that vision as easy as possible.
What considerations should a fintech startup take into account to ensure success?
You can’t place enough importance on listening and responding to your customers’ fundamental challenges.
At LedgerEdge, our goal is as ambitious as it is exciting; to deliver a fundamentally better ecosystem and experience for finding data, sharing data and executing trades in the corporate bond market. The only way to deliver on this promise is to listen to the diverse requirements of all market segments and have them both validate and challenge our working assumptions. This is why we are launching a series of market-wide working groups to ensure our platform is built by the industry, for the industry.
I would urge all fintech startups to consider the industry-led collaborative model when developing technology solutions for this sector. Too many fintech companies with initially promising visions have ultimately fallen by the wayside because the product they ended up delivering did not meet the real world requirements of their customers. Working with the industry towards a set of shared goals is the ultimate catalyst for success in this sector.