Thomson Financial today announced that Tradeweb, its on-line trading platform that already offers many flavours of fixed income products including credit default swap indices and interest rate swaps, was to begin trading in convertible bonds. The launch seems to have been timed carefully as Tradeweb faces increasing competition from the investment banks in the form of LiquidityHub (see earlier article). LiquidityHub have noticeably signed distribution deals with Reuters and Bloomberg - and thus were effectively trying to squeeze Thomsons out of the market. The mooted merger of TF and Reuters could of course scupper this anyway, but Tradeweb certainly seems to be positioning itself as an invaluable asset in the buy side world should that merger actually happen.

However, company jostling aside, I do think that this will be a boon for many a buy side manager. I have always found convertible bonds to be strange beasts, and pricing the things has always been tricky. Most managers that I know who have them in their portfolios tend to spend half their life ringing around dealers to get a composite price.

Convertibles behave peculiarly. For example, when the price of the underlying stock is far from the conversion price, a convertible trades much like a bond. These "busted convertibles" gain value when interest rates fall; they fall in price when interest rates rise. But when the underlying stock approaches the conversion price, however, a convertible bond begins to trade in lockstep with the stock. A good way of showing this can be seen in the diagram below:


So  any  electronic market that can aid in the price transparency of these things must be a blessing to your average investment  manager and will provide a bit of competition to Market Axess's BondTicker service.