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European Bond Commission Fixed Income Markets & Electronic Trading Michael Ezra

APPENDIX E. European Bond Commission Fixed Income Markets & Electronic Trading Michael Ezra. 8 October 1999, Paris. Instinet - Equities. world’s largest agency broker active in over 40 markets world-wide 30 years of financial services industry experience

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European Bond Commission Fixed Income Markets & Electronic Trading Michael Ezra

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  1. APPENDIX E European Bond CommissionFixed Income Markets & Electronic TradingMichael Ezra 8 October 1999, Paris

  2. Instinet - Equities • world’s largest agency broker • active in over 40 markets world-wide • 30 years of financial services industry experience • market leader in electronic transaction services • wholly owned by Reuters • over 300,000 equity market transactions per day

  3. Instinet - Business Model Core Principals • Anonymity • Transparency • Neutrality • These same principals lend themselves to the bond markets

  4. Dealer Access Local Markets Local Markets IFIM System Local Markets Client A Client B Client H Client C IFIM Business Client G Client D Client F Client E

  5. Trading Functionality (Main View) View of the Benchmark “Market Level View” Top of book (best) prices per instrument Price / time priority Lists are customisable by the user View of the benchmark “Market Level View” Instruments Relevant to instruments relevant to Of Top of Book (Best) Prices Per Instrument the Market Levels the market levels selected On the Instinet Fixed Income Service Selected “Order Book” “Order Book” Depth of book Shows All Live Orders for a Given Instrument Within the Instinet Fixed Income Service This is the Work Area for Managing Orders Client Can Have Multiple Copies With Different Instruments Up At One Time “Info” provides information relevant to order e.g.: “R” indicates “Revenue Book” “N” indicates negotiable order Depth of Book Shows All Live Orders for a Given Instrument Within the Instinet Fixed Income Service This is the Work Area for Managing Orders Client Can Have Multiple Copies With Different Instruments Up At One Time The System Supports Existing Pricing Conventions - e.g. “. xx ” Denotes Decimal Client can customise individual “pages” for classes of instruments and easily switch between them Client Can Customize ” of Instruments and Easily Switch Between Them

  6. Live orders in the system Trading Functionality (Order Book) “Reserve” Orders Can Be “Reserve” Orders Can Be Entered Entered With Part or All of the Order “Shown” But Still Can Be Order “Shown” But Still Can Be Executed Against In Its Entirety Executed Against In Its Entirety In the Example Book to the Left, In the Example Book to the Left, a Client Has Entered a “N” Non- a Client Has Entered a “N” Non- Negotiable Order with a “R” Negotiable Order with a “R” Reserve Quantity that is Not Reserve Quantity that is Not Shown in the Book (i.e. the Shown in the Book (i.e. the Order Size is Bigger than 10 Order Size is Bigger than 10 Million Par Amount) Million Par Amount) The Application Can Calculate The Application Can Calculate an Average Price on a Series of an Average Price on a Series of Orders So That Clients Can Orders So That Clients Can “Sweep the Book” “Sweep the Book”

  7. Instinet Fixed Income Markets A new brokerage model - Instinet • fully electronic broker platform • complete anonymity • one counterparty • broker desk actively incentivises liquidity • aggressive “hit and take”; no quote obligations • global access • best of breed technology

  8. What are the issues now? • Ownership: consortium (utility) vs for-profit vendor supported solutions • Name give-up or matched principal • Quality of technology: Global or local access, how will the service be delivered • Quotation obligations or natural liquidity • Cost of market access • Breakdown of barriers or two tier models • Market makers only or wider participation

  9. Liquidity takers…participation or not? Issues relating to “buy-side” participation • debate over the value of an investor franchise intensifies amongst the banks • costs of supporting the franchise escalate • banks restructure their service offerings - margin chasing • fragmentation of market place • size and frequency of trades • a two tiered market • effect on specialist services • research; broker expertise

  10. Market Evolution Ownership - User-owned Vendor-supported systems - Name give-up Anonymity Matched principal Control - Shareholders Execution control / “Board” Balance sheet, Risk Capital One counterparty / netting - Many counterparties Access - Domestic Global In-house development - Stand alone Integrated; Through processing Participation Wider participation in future? - Professional sell-side

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