Canada's Electronic Market for Canadian Dollar Debt Securities

On which market is most financial trading done in Canada? Naturally, the mind goes to the TSX. The electronic bond market, however, has been making steady gains in recent years. In fact, since October 2011, monthly trading on the electronic bond market surpassed that of stock trades on the TSX.

CanDeal, the leading electronic marketplace for Canadian dollar debt securities, is owned by all six major Canadian banks and the TMX group, and provides institutional investors with access to dealer liquidity for Canadian government bonds, and money market instruments. The recent numbers are impressive, with $1.1 trillion traded in the first eight months of 2012 (129,000+ trades), and $1.5 trillion traded in 2011 (172,000+ trades). CanDeal has broken several of its already impressive records in 2012, setting a record monthly volume in June with $180 billion, and an all-time high in the second quarter of $484 billion.

CanDeal has been a leader in the Canadian fixed income and money market for more than 10 years. Its business model is based around providing institutional investors (money managers, banks, hedge funds, pension funds, etc.) with an electronic marketplace for Canadian dollar debt securities that delivers optimal transparency and efficient trade execution, while reducing operational risk with its seamlessly integrated post-trade processing services. Since its inception, there have been $6.2 trillion in notional volume, representing more than 745,000 trades.

Transitioning to an Electronic Model

Launched during the dot-com boom in 1998, CanDeal entered into the arena of electronic communication networks (ECNs) being launched against the backdrop of booming equity markets. Many fixed income electronic trading platforms emerged during this period in the U.S., but only one or two could be considered truly successful.

It was at this point that Jayson Horner, CEO, President and Co-Founder of CanDeal, and Managing Director of TD Securities during that time, spotted the opportunity. Using the U.S. market as a precursor, Horner identified that the business was about to transform from the traditional way of doing business via telephone to electronic trading platforms. “What was happening up here in Canada was that the over-the-counter bond market was lagging in terms of technology,” he explains. “We entered into this with the idea that Canada has a unique marketplace and unique structure. I thought it was important for Canada’s fixed income marketplace to be supported by the leading dealers in Canada, and that the institutional client base was represented from a Canadian perspective.”

Horner realized that, as market leaders, the major Canadian banks should be involved. Also, as these banks have a customer base that trades Canadian dollar debt, it was a logical opportunity to create a uniquely Canadian business model. The Canadian over the-counter bond market is fairly concentrated, and Horner was able to bring together the major Canadian players to present his ideas. “Speaking with the six major banks, we showed them what was going on elsewhere in in the world, and challenged them as the market leaders to address the situation in Canada. Also, our market is dominated by thousands of different securities with a limited amount of participants; it’s almost the exact opposite of the equity market,” Horner explains. “Our success was a matter of understanding how our market structure works, and seeing how the electronic market brought a number of efficiencies into this market.”

The System and Philosophy

CanDeal created a system for trading fixed income securities characterized by the ability for clients to simultaneously query multiple dealers for executable prices, and then transact in a few simple clicks. This request-for-quote [RFQ] model modernized the traditional method of calling three or four dealers to obtain the best price, and created a virtually instant electronic “conversation” between counterparties.

The major advantage of getting several quotes at the same time is the ease to which a buyer can follow internal compliance requirements, best practices or other mandates, without having to call multiple dealers. “We’ve changed that sequential process of picking up the phone, calling several dealers, and then going back to the dealer you’re interested in, at the risk that the market may have moved over the period,” says Horner. Using the CanDeal system buyers, are able to query up to four dealers at the same time and get the responses back in 10 to 15 seconds, dramatically improving efficiency for the user.

Another benefit of CanDeal is that participants can manage their trade flow more efficiently. It is better for price discovery, and actually increases transparency within the bond market. “We help our participants meet and exceed their regulatory and compliance needs. All communication through the system is recorded and can be easily accessed by the counterparties for audit purposes,” says Horner. The system also decreased the possibility for human error by avoiding issues like transposing incorrectly, and proves that the user gets the best price on the market. Many buy-side clients feed their trades into their order management systems, which cuts down dramatically on errors.

Revenue Streams

CanDeal has progressed as a business, and now has several revenue streams. Buy-side users of CanDeal pay a flat monthly fee per user [per login] to access the platform. “It’s similar to that on the sell-side, but dealers also have a per million fee charge based on their volume traded. Our revenues are driven by transactions,” says Horner.

There is also a successful data revenue stream from the information that the business provides. CanDeal is the only source that creates a dynamic view of the Canadian government bond market. Hundreds of thousands of price updates are received daily to produce a real-time continuous “bid/ask” composite of the entire Canadian bond market. This proprietary data is sold through vendors, as well as through CanDeal itself.

Future Projects

Like any company, CanDeal strives to improve its products. What about new projects on the horizon? CanDeal key area of focus for development in the near future is the derivatives marketplace. “After the fallout of 2008, there has been a lot of focus on structured products and mitigating systemic risks in the derivatives market, so the focus is on electronically trading the derivatives market,” Horner explains. “We are rolling out a version of this for Canadian dollar products that we expect will be out later this year, and it’s an area we expect to grow substantially.” If the past success and a record-breaking 2012 is any indication, it should become yet another successful and innovative CanDeal initiative.