’He’s a Catalyst’

In the 1990s, McQuown and two partners devised a way to use a company’s stock price to predict how likely it was to default on its debts. The analytical tool, which the trio sold to Moody’s Corp. in 2002 for $220 million, is a fixture on trading floors worldwide. Today, McQuown is a partner in DCI, a $5 billion fixed-income hedge fund in San Francisco.

“Mac’s one of those guys who’s been very influential behind the scenes,” says Booth, a billionaire who donated $300 million to what became the University of Chicago Booth School of Business in 2008. “To bring about fundamental change, you need great thinkers and researchers, but you also need implementers. People like Mac don’t win Nobel Prizes; they implement the ideas of the guys who do. He’s a catalyst.”

Now McQuown and MacWilliams, eBond Advisors’ managing partner, are betting they can move a market that has proved impervious to change.

For the past 25 years, the two men have watched as equities trading has become as easy and accessible as online shopping.

Liar’s Poker

When it comes to bonds, little has changed since the days when Michael Lewis played liar’s poker with his pals at Salomon Brothers in the 1980s.

Eight out of 10 deals are still executed by two traders on the phone, according to Greenwich Associates, a research firm in Stamford, Connecticut. Wall Street’s top 10 banks still control 90 percent of trading in corporate bonds. And the market is still fragmented into tens of thousands of bond issues because a single company can sell scores of unique notes with varying maturities and interest rates.

“We’ve had a transparent equity market since it began, but we still don’t have a transparent debt market,” McQuown says. “Instead, we have all these bilateral arrangements with highly levered and highly volatile dealers. There’s no reason in the world why corporate bonds shouldn’t trade like equities.”

‘Broken Market’

For entrepreneurs and market stalwarts alike, such structural flaws aren’t a worry; they’re an opportunity.

BlackRock, the No. 1 global investment firm, with $4.3 trillion in assets, has formed a strategic alliance with MarketAxess Holdings Inc. to offer investors an alternative to what it calls a “broken market.”

New York–based Electronifie Inc. is one of several startups coming online to help investors bypass banks and find liquidity in “dark pools,” which are private exchanges used to trade stocks.

Banks, too, are joining the push. Late last year, Goldman Sachs Group Inc., Credit Suisse Group AG and 10 of their rivals allied with more than a dozen investment firms to form a global trading network dubbed Project Neptune. (Bloomberg LP, the parent of Bloomberg News, also operates an electronic trading platform for fixed-income securities.)

Reinventing The Bond

“Investors have been building larger and larger positions of credit exposure in their portfolios, and they’re going to need alternative ways to exit them,” says Richard McVey, chief executive officer of MarketAxess, the No. 1 digital hub for corporate bonds in the U.S. “This is a massive capital markets problem, and it needs to be solved.”

McQuown, still spry, with a mop of snowy hair, a California tan and a kung-fu grip of a handshake, isn’t interested in starting an electronic trading platform. He and MacWilliams have set out to reinvent the bond itself.

Peter Aherne, head of North America capital markets, syndicate and new products at Citigroup, agrees that the eBond could be a breakthrough.

“By linking credit protection and a bond in a single security, I would expect there to be portfolio benefits in terms of risk management and trading opportunities,” Aherne says. “More buyers for these securities should enhance the liquidity of the bonds.”

But as McQuown and MacWilliams introduce their new product, they may find fund managers underwhelmed by the idea of a riskless corporate bond.

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