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Why one trader quit Citigroup to start the ‘eBay’ of bond markets

Bond-markets

Paul Reynolds quit Citigroup in 2012 after nearly 30 years as a fixed income trader, but in contrast to the banks’ focus on elite graduates these days, he only went into finance in the first place because his studies were scuppered by ill health. Hit by ME as a teenager, he failed to get into university and his dream of working for the UK foreign office were dashed. Banking was a fallback.

I was a clerk, running around the City delivering great wads of treasury bills in an envelope – all very Dickinsian, Share on twitter” he says. “Later I became a position keeper – I was sat at a desk keeping track of traders’ positions using mental arithmetic, telling them when they’d borrowed enough money to close their books. It was a ludicrously chaotic and responsible position for a 19-year-old, but I loved it.”

An impossible task

It’s a low-fi start considering his current venture. Reynolds is now CEO of Bondcube, a fixed income trading platform that is taking on what is generally accepted to be impossible – electronifying the fixed income market. The relative illiquidity, as well as the sheer variety and complexity of the bond market, has led most to shy away from even trying.

Goldman Sachs quietly retreated from its GSessions electronic bond trading platform last year, while other systems like Morgan Stanley’s Bond Pool, BlackRock’s Aladdin and UBS’s PIN still account for just 1% of the market. Reynolds thinks he has the solution – make the bond market like eBay.

“The first question anyone asks is why the hell we’re trying to do this,” says Reynolds. “Consultants have told us that our business model is closer to eBay or Match.com than another trading platform Share on twitter.”

In the eBay scenario, large institutional investors are the customers buying and selling bonds. Bondcube’s algorithms attempt to find the best match to suit both parties and the transaction is carried out in privately in the ‘dark’ market. The investment banks are like PayPal, acting as intermediary between the buyer and seller and taking a cut Share on twitter. The banks earn a fully disclosed fee from both sides while Bondcube takes a small part of the fee from the banks, says Reynolds.

“The bond market is an inverse pyramid – there are hundreds of thousands of products, thousands of potential investors and they’re all relying on the shrinking balance sheets of a very small number of banks. It’s a bottleneck and this is an opportunity,” he says.

A reluctant entrepreneur

Reynolds left his job as a director on Citigroup’s euro corporate bonds trading desk in 2012, but Bondcube only officially launched earlier this month. Although ostensibly a trader in every job he’s held – which includes stints at UBS and Deutsche Bank – he’s also managed to convince his employer to invest in an entrepreneurial idea.

He helped kick-start Deutsche’s Autobahn e-trading platform in the 1990s by hooking the trading platform up to a Bloomberg terminal. “We convinced investors to trade with us through Bloomberg and my trades increased from 100 a day using intercoms or shouting across a trading floor, to 300 a day electronically. It was a revolution and our market share increased massively,” he says.

Reynolds says that he attempted to convince Citi to invest in the idea that eventually became Bondcube, which stemmed from the concept of using technology to make up for the shortfall in investment banks’ balance sheets in the fixed income market, but they didn’t bite. So, he “perhaps foolishly” quit and decided to go it alone.

Bondcube now has 34 employees across five offices in the UK and the U.S., but it started in 2012 with Reynolds and ex-Royal Bank of Scotland quant, Mark Germain. “A year ago, we were just two guys and a laptop,” says Reynolds. The platform has “Silicon Valley technology”, but it’s been developed by Germain and 15 other technology employees out of the firm’s office in the picturesque city of Winchester, Hampshire.

The idea only became serious when Bondcube received significant funding – Deutsche Börse took a minority stake in February 2014, injecting “a low sum in single-digit millions sterling”.

Reynolds says that his entire career has been based around having “good ideas at the right time” and in most cases convincing his employer to back him. However, his advice to any budding banker entrepreneur is to ensure you have the stamina and personality to cut it.

“You need to be able to run a marathon at sprint pace and realise everything you do will take longer and be more difficult than you ever imagined,” he says. “You need to have the sort of personality that tackles problems as they occur – if you push them away, they will come back even bigger.”

 

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