The Great Fixed Income Acquisition Spree
ICE Buys TMC Bonds
The big news last week in fixed income was that ICE bought TMC Bonds for $685 million. The TMC purchase comes on top of ICE’s $400 million acquisition of Virtu BondPoint at the beginning of the year.
ICE paid a significant premium for TMC Bonds, even in comparison to the Virtu BondPoint acquisition. As we learned in our story Inside the Virtu BondPoint Sale, BondPoint made around $31 million in revenue and sold for $400 million. According to sources familiar with the company, TMC has revenue that is slightly higher than BondPoint, but significantly more costs. Those costs are due to its larger sales force and its anonymous trading model, which introduces clearing costs when its broker-dealer stands in the middle of trades.
Why did TMC fetch such a premium? First, TMC was the last of the independent retail corporate bond platforms with significant traction: Tradeweb Retail (BondDesk acquisition), ICE BondPoint (Virtu BondPoint acquisition), TMC Bonds, and MarketAxess are the only players in the space. ICE’s purchase is largely a defensive play to prevent competitors from gaining a larger foothold in retail credit trading.
Second, Virtu was in a difficult position following the KCG merger. It had a ton of debt and an unfavorable market making environment. Virtu likely could have squeezed a lot more out of BondPoint had Virtu been more patient with its disposition of assets.
Tradeweb and MarketAxess were both in serious discussions about purchasing TMC Bonds according to sources familiar with the matter. TMC’s anonymous alternative trading system was complimentary to Tradeweb and MarketAxess’ existing bilateral trading model. However, ICE came in over the top with a bid that neither firm was interested in matching. An executive at one of the firms quipped that the “bid-ask spread was not even close,” implying that they were far apart from an agreement on price. It is likely that only ICE could justify the price tag because the execution business is accretive to ICE’s much larger data services business.
Tradeweb finds itself in a difficult position in credit after this acquisition. It has two separate corporate bond trading platforms: retail and institutional. The institutional business is facing an uphill climb in taking on MarketAxess. The retail business now has a behemoth in ICE to compete against.
According to two people familiar with internal deliberations at Tradeweb, the company is “looking to make acquisitions to complement existing businesses” before splitting from Thompson Reuters. Whether that includes an acquisition in the corporate bond market remains to be seen.
MarketAxess, on the other hand, seems committed to building out a retail business internally, as it emphasized in the Q3 2017 earnings call.
The Great Fixed Income Acquisition Race
TMC Bonds is just the latest in a string of over $9 billion in fixed income acquisitions over the past year, including:
- $686 million. ICE buys TMC Bonds, the largest corporate bond retail alternative trading system.
- $1.86 billion. IHS Markit buys Ipreo, a financial data services firm.
- $5.5 billion. CME buys NEX, a consolidation of the largest U.S. Treasury futures and cash platforms.
- $400 million. ICE buys Virtu BondPoint, one of the leading corporate bond trading platforms.
- $685 million. LSE buys Citi YieldBook, a fixed income analytics and index business.
In addition, Blackstone is working on spinning out Tradeweb from Thompson Reuters in what could be a $4 billion deal. Just two years ago, ICE bought IDC, the leading provider of fixed income data services, for $5.2 billion and Bloomberg bought Barclay’s fixed income index benchmark business for $781 million.
Why the sudden flurry of activity? A wave of innovations, acquisitions, and public offerings often happen when there is a significant change in the market structure. In U.S. equities, this happened in 2005 when Reg NMS created a national market system. Exchanges could no longer offer preferential access, quotes across market centers had to be treated equally, and the market standardized conventions like minimum tick size. This allowed new venues to break into the market and sent the incumbents scrambling to make acquisitions. In 2005 and 2006 alone, Nasdaq bought Island, Bats was launched, Direct Edge was spun out of Knight, and NYSE bought Archipelago and went public. These two years shaped the equities market that we know today.
We are at the beginning of the same innovation cycle in fixed income. As we wrote in The Final Nail in the Coffin, the reason this is happening is because dealer influence in the fixed income markets is waning, “Electronification democratized access to the market and reduced the influence of gatekeepers on market structure.” In addition to technology, post-crisis regulatory reform and increased capital requirements have fundamentally weakened the ability of banks to be the sole liquidity providers. As a result, the old models that were centered around dealer provided-liquidity are breaking down.
As we think about who is next in the space, I focus on the following three trends that have emerged in nearly all the acquisitions thus far: vertical integration of fixed income products is now possible, data is the most valuable asset, and it is mostly the incumbents that are benefiting.
Trend #1: Vertical Integration. Vertical integration has been notoriously difficult in fixed income markets where large dealer balance sheets have given banks outsized sway over the market structure. Banks have focused their efforts on creating/supporting interdealer brokers (e.g., BrokerTec) and dealer-to-client platforms (e.g., Tradeweb) that narrowly meet their execution needs. Firms that specialized in data services (e.g., IDC) did not have an execution component.
A common thread throughout all the acquisitions in the space is finally achieving vertical integration. CME-BrokerTec will own the entire trade lifecycle from funding to execution to clearing to settlement. Ipreo has a unique role facilitating primary credit markets in Europe and Markit’s credit indexes will now have information about the entire lifecycle of a bond, from issuance to maturity.
Trend #2: Data is King. Each of the acquisitions is focused primarily around data or enhancing existing data services business (with the exception of CME-BrokerTec where the data is secondary to the combined cash/futures efficiencies in Treasuries and foreign exchange). ICE’s purchase of BondPoint and TMC Bonds is made possible because the data the platforms generate is valuable to ICE Data Services (i.e., the IDC acquisition). The indices business sold by Citi to LSE likewise fits much better into the exchange’s larger data services business.
How valuable is that data? IDC was purchased for 5x the combined price of BondPoint and TMC Bonds. If you look at the equities market, exchanges make far more in data services revenue than they do execution fees. And as we discussed in Tradeweb Gearing Up for a Sale, Tradeweb has an opportunity to turn its $4 billion execution business into a $10 to $20 billion data services business. Tradeweb currently leverages almost none of this data for internal use, and data makes up a minimal part of its revenue stream. If Tradeweb were to retool the company around data services instead of execution, it could create a data services business that rivals Bloomberg or Thompson Reuters.
Trend #3: Incumbents Only. A big difference between the great fixed income acquisition race and the revolution in equities a generation ago is that you do not see a whole lot of startups gaining traction. The first Fixed Income Leaders Summit occurred amidst the launch of a dozen new credit trading platforms. Whatever happened to them? Most of them are now dead or acqui-hired. The only startup credit platform you hear of anymore is TruMid, which not coincidently has a new data product that is taking up more and more of the conversation with buy-side clients.
Perhaps we are too early in the cycle to see fixed income startups get to the stage where they get acquired or IPO, but I am struck that the winners so far have largely been the incumbents established a generation ago. There does not appear to be companies like Bats or Direct Edge that are able to grow organically to significant market share.
The Time is Now
TMC Bonds is the latest in a $9 billion acquisition spree in fixed income. These acquisitions are the fruits of electronification and post-crisis regulations that have reduced the influence of dealers in the market structure. A lot more of these acquisitions are coming as firms learn to vertically integrate fixed income platforms and take advantage of an untapped market for fixed income data.
