The Growing Threat of Private Exchanges

The leading competitor to Goldman's GSTrUE structure, OPUS-5, added three more banks to its burgeoning ranks. As reported in today's Financial Times:

Bank of America, Credit Suisse and UBS on Wednesday said they would join a consortium of investment banks that have set up a platform to trade unregistered securities.

The announcement could jeopardise the existence of similar platforms set up by individual banks, such as the GS TrUE system launched by Goldman Sachs.

The consortium platform, first disclosed by the Financial Times in July, was initially set up by Merrill Lynch, Lehman Brothers, Morgan Stanley, Citigroup and Bank of New York, which acts as administrator of the system.

Members said others would likely join the platform because it would provide the most liquidity for trading and thus attract the greatest number of listings.

Is this a threat to Goldman? To some extent. But the bottom line is, however, that they've printed some pretty attractive deals with some marquee names and OPUS-5 hasn't. This doesn't mean that OPUS-5 won't get its share of deal flow, but I wouldn't be holding my breath for Goldman to be quaking in their boots. Ultimately I foresee a merger of the Wall Street exchange platforms, including Goldman and JP Morgan, into a unified private venue. I think the big loser here could be NASDAQ's Portal platform. Because if the major Wall Street firms have their own exchange to trade both new and seasoned issues, then what role does that leave for Portal? Answer: none. The Street has done a pretty good job setting up consortia to do a bunch of complex things, whether it's a low-cost electronic foreign exchange trading platform, providing prices and liquidity for credit derivative products, etc., so a multi-headed alliance around the issuance and trading of private placements is not far-fetched.

The trick is to get Goldman into the OPUS-5 fold to really put the public exchanges on their heels. Because as I've said before, the private exchange model is a real threat to the public exchanges for the cream of the new-issuance market, and having the biggest firms on the Street with aligned interests is a scary proposition for the SEC, Congress and the more heavily regulated public market platforms.

Comments

[james]

must Hf have "third party access" to DEaler only Mkt to trade the private maket of Credit Derivat's?

[Yaser Anwar]

Can I be the Canadian voice?

The Canadian/US banks operating here are also creating a private exchange dubbed as "Project Alpha" similar to their counterparts in London/NYC.

[Nick Ravo]

Just a quick thought; Why isn't this an anti-trust issue, banks coming together (collusion) to set prices, control a market? Any lawyers out there?

[2L]

I have to admit that I would really enjoy public exchanges no longer existing.

"One of the first big bubbles, of course, was the huge and horrible South Sea bubble in England. And the aftermath was interesting. Many of you probably don’t remember what happened after the South Sea Bubble, which caused an enormous financial contraction, and a lot of pain. They banned publicly traded stock in England for decades. Parliament passed a law that said you can have a partnership with a few partners, but you can’t have publicly traded stock. And, by the way, England continued to grow without publicly traded stock. The people who are in the business of prospering because there’s a lot of stock being traded in casino-like frenzy wouldn’t like this example if they studied it enough. It didn’t ruin England to have a long period when they didn’t have publicly traded shares. "

[Roger]

Byrne, I was thinking of entities like Markit and CDSIndexCo. These involve widespread Wall Street participation in the credit derivatives arena.

[Byrne]

How do they provide credit derivative liquidity?