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MBS Internet Trading Expected To Take Off: Automated Search Engines the Next Step, Sources Say

Despite the findings of last week's Federal Reserve study regarding the GSEs' inability to add liquidity to the market (see story above), some market players believe that the market is so liquid that improving liquidity for MBS by utilizing Internet bond trading sites is not even a big incremental step forward for the industry.

Even still, some market players are already predicting that within the next two years, firms will set up highly automated methods of surfing all of the bond-trading Web sites at once, in order to find specific bonds which fit their particular parameters.

"I would think there would be an automated process of going over options sites you queue up, and a more systematic and efficient way of looking for categorization parameters on all of these sites," said an MBS trader.

Additionally, bond-trading platforms such as Pedestal, VisibleMarkets and TradeWeb help avoid any issues with trade disputes, and make it easier for traders to pass on basic market information, such as if there is a bid list, sources say.

"To the extent that people can categorize bonds into groups of securities that are reasonably comparable, investors will work with the Street to make these MBS exchanges work," said Steve Point, an MBS investor at The Glenmede Trust Company. "You will get efficient quotes, and the option format for dealing with structured product is definitely promising."

E-trading for mortgage-backeds is convenient to do and helps for time-sensitive trades, several sources say, especially for the TBA market. The very best of the latest platforms actually let you see the dealers which you are working with and do not take the market away, but instead make it way more efficient.

Moreover, some of the systems have adapted well in early trials of trading in the collateralized mortgage obligation market, which is a good sign, since all CMOs are slightly different from one another.

Right now, the Achilles heel of the entire MBS online bond-trading process seems to be on the legal and technological fronts. Investors and traders must sift through tremendous amounts of legal documentation before deciding on a trading platform to sign up with, Point says.

On the technological side, managers are quite anxious about security, and anything regarding firewall access seems to become a major issue .

"The functionality is really good and slick, though making it seamless is tougher," Point said. "Lots of marketing people come around and demonstrate the system, but then we get lost in legal red tape."

These are still the very early stages of developing trading for all types of MBS. Even though it is early on, however, companies that only deal in whole loans or Treasurys seem to indicate that they will progress with their product offerings rather rapidly, the trader added.

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