VideoAn added benefit of an open auction appears to be a broader distribution pattern among investors — something issuers like because it can reduce the volatility of the securities in the secondary market. The Dow E-bond auction attracted 57 investors, about three times the usual number for a deal of that size. Bear Stearns ended up with 129 investors, about twice the normal number. "It may have been investor curiosity as much as anything else," says Cioffi.
Whatever the reasons, the auctions clearly generated a lot of interest in the investor community. "The process unfolded just as our game theorists predicted: as the auction progressed, the pace of bidding increased and the spread came down," says Cioffi, who handled Bear Stearns's auction of its own debt.
And the initial concerns about liquidity in the aftermarket proved to be unfounded. Unlike stocks, bonds — even of large issuers — are not terribly liquid, so the market-making support of the investment community can be important. Although it is difficult to measure liquidity, Dow's E-bond is trading at prices and volumes related to the company's credit rating, the size of the offering and prevailing interest rates — just like any other bond issued by the company.
So what will kick-start the market for web-based bond auctions? Falling interest rates could help. So too, could the successful auction of $5 billion in three-year notes on February 9 by residential mortgage agency Freddie Mac (www.freddiemac.com) in the US. As Jon Prince, manager of debt marketing for Freddie Mac, says: "An auction is more interesting to a bull than a bear."
Yet many investors will likely sit on the sidelines until one system is established as a de facto standard. That hasn't happened yet, and in a shaky credit environment with a recession threatening, it may not for a while. Hambrecht, however, recently scored a huge endorsement when Freddie Mac announced it would use the system for some large tranches of its reference-note debt program.
Both proponents and opponents of online Dutch auctions of corporate debt say one thing is clear: the system works best for large, plain-vanilla issues with good credit stories. That's why TradeWeb and MuniAuction are already up and running with agency issues. For corporates, that means quality investment-grade debt, and maybe asset-backed securities. Says Hambrecht's Goldberg: "It's always better to introduce change with well-known credits that don't need a lot of explanation."
Emily S. Plishner is a freelance writer based in New York.
E-Bond Trading Networks
W.R. Hambrecht's OpenBook (www.openbook.com for a demo). Dow Chemical has used Hambrecht's system, and Freddie Mac has committed to future reference bill auctions using the same core technology. Initial bids are marked with a time stamp. If the bidders improve their bids, they keep the initial time indicator. If more than one bidder comes in at the clearing price at the end of the auction, the awards are determined by which bid first. OpenBook offers anonymity to investors.
Bear, Stearns's DAiSS (www.bearstearns.com for a demo). DAiSS (Dutch auction Internet syndicate system) has no time stamp, because Bear's system builders found that investors don't want to be penalized if their Internet connections are accidentally cut off in mid-auction. Bear's system involves two rounds of bidding, with all bids visible to participants.
Deutsche Bank (Deutsche's general capital markets site, www.dbbonds.com, for more information). Deutsche has capabilities for both American- and Dutch-style auctions, either open or closed. Deutsche's own auction was blind, with bidders unable to see other bids.
MuniAuction (www.grantstreet.com). MuniAuction, now renamed Grant Street Group, has hosted more than 1,300 Web auctions for $1.3 trillion in municipal, government, and agency bonds, but none yet for corporate bonds.
BondBook (www.bondbook.com). BondBook is a start-up financed by Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, and Deutsche Bank, whose aim is to "[improve] liquidity and transparency" in targeted fixed-income markets. Although it intends to distribute corporate new issues eventually, it has not yet done so. BondBook is not planning any auction pricing online.
Market Axess (www.marketaxess.com). Market Axess is a competing platform with intentions similar to BondBook's. Current investors and dealers include ABN Amro; Bear, Stearns; Deutsche Bank; J.P. Morgan Chase; Lehman Brothers; and UBS Warburg. The venture is acquiring Trading Edge, a platform that allows for anonymous trading.
TradeWeb (www.tradeweb.com). TradeWeb conducts online auctions of U.S. Treasury bonds, and serves as a trading platform for government and agency bonds in the secondary market. It is not planning to get into the corporate bond market.
There are about 80 other secondary electronic trading platforms in the market. —E.S.P.
The Flying Dutchmen
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