With the onslaught of companies trading mortgage-backed securities online, ABS e-trading can't be far behind, according to industry sources.
Companies have been testing the waters with MBS is because there's more volume and products are much more generic.
"As this technology begins to expand and increase in popularity and users begin to get a better handle on it," said Larry Tabb, group director for securities and invesment practice at Tower Group. "And as those systems shake out and we wind up seeing one or two primary systems within a market, these companies will try and expand their product reach."
An example, he said, would be a company like Trade Web LLC, which started in the treasury market then moved into the agency and Euro market and is now looking into mortgage-backeds. "Since they are owned by the primary dealers, I would anticipate that they would try and leverage their trade-web relationship into more products."
Though currently more market participants are drawn to online MBS trading, some are already launching asset-backed web-based trading programs.
A company which is very close to launching an online trading auction-based system which will include ABS, MBS and commercial mortgage-backed securities is Visible Markets.
"What we are proposing is an open matching system directly linking market participants," said Bill Martin, director of marketing at Visible Markets.
He said that the auction-based system benefits both the sell side and the buy-side.
"Sellers benefit from getting a more competitive price through total market participation, Martin said, "while the buyer gets to know and see what the other bids are in the bidstream and has access to better transparency." He added that it is also a cost efficient way for dealers to reach the middle market and small asset managers.
Another company planning to go into asset-backeds is Pedestal Inc., which currently trades to-be-announced (TBA) mortgage-backed securities and residential and commercial whole loans online.
"We expect to be trading asset-backed securities later in the year," said John Lewis, managing director of communications at Pedestal.
The company is planning a "neutral" multi-dealer platform that would accommodate a "fairly natural" transition between mortgage-backeds and asset-backeds. The company is going to launch its online mortgage-backed system simultaneously with its ABS platform.
Pedestal is considering creating an auction-based system, though it hasn't firmed up its plans yet. "When you move into the asset-backed market, since the securities are less commoditized, it is not clear yet how the pricing may be done," Lewis said.
This movement towards online ABS trading is a trend going forward. VM's Martin said that dealer capital has been consolidating and shrinking in the asset-backed community. This is why managers have been looking for alternative sources of liquidity.
"The October 1998 crisis, for instance, really paved the way for a system like ours," Martin stated. "Home-equity loans or in general, asset-backed spreads, doubled during that market failure. It was indicative of processes in place to transact as much as market events themselves. So we anticipate increased liquidity in the asset-backed market as well as in mortgage-backeds."