On this episode of CoinScrum’s Meet the Founders, our host, Oscar Hammond interviewed David Nicol, CEO, LedgerEdge about the DLT-based ecosystem he and his team are developing to help streamline this very large, yet hugely inefficient Corporate Bond market.
The advent of Bitcoin, Ethereum and other decentralised Blockchain networks have, without doubt, highlighted how outdated and inefficient much of the market infrastructure underpinning a swathe of traditional multi-trillion-dollar asset classes are. One such asset class is the Corporate Bond market where, unlike more regular listed equities, the customised nature of these instruments makes trading and price discovery far more challenging. Emerging from the banking consortia R3, LedgeEdge seeks to revolutionize the space with DLT and AI.
What is Ledger Edge
(00:28) LedgerEdge is a new ecosystem for corporate bond trading using distributed ledger technology to transform the way the secondary market for corporate bonds runs. Before ledger edge was founded a year and a few weeks ago, David worked at R3, a blockchain technology company, specializing in capital markets and product management.
Before R3, David ran a portfolio of fintech companies working at the intersection of payments and AI technology as part of IBM’S Watson Commerce program. It was there that he experimented with blockchain and found R3, as a place to realize his newfound ideas.
(01:59) David entry into the Digital Ledger Technology (DLT) space at R3 exposed him to digital assets and the full life cycle of different asset classes such as those at the Swiss digital exchange and a few other DLT based issuance and settlement platforms in different asset classes.
(03:38) David was joined last September by Tim cook, who is the former head of international business development at a company with a very similar name, but in a different market, Liquidity Edge. Ian Chicken, a seasoned COO brings on his expansive experience of launching perhaps more electronic venues than anyone else in the market and has been a part of the team since day one. Bob Bose, the company’s CTO, has run both big projects at banks and institutions as well as in the startup space. This senior management team is joined by 11 more talented people to make the Ledger Edge Team.
The Behind-The-Scenes Co-Founder
David Rutter, founder and CEO of R3, David Nicol’s previous company is also a founder and primary backer of LedgerEdge. The idea came of LedgerEdge came from discussions with Rutter when Nicol and he started looking at the corporate bond space and wondering why it continues to be inefficient and how they could improve the mobility of assets across while taking advantage of the innovation in the blockchain space like new primary issuance venues, new settlement methods, and new ways of managing assets through the life cycle.
“I took the idea to David and I said, I think the time is now and I think we should start this company. And he’s a serial entrepreneur in the space and he’s been bringing innovation into capital markets, and even into credit markets for the last 10 years. I think that this particular idea with ledgerEdge was only able to be developed because DLT technology has reached a certain point in its maturity where we can now build on it with lots of confidence and run it at the levels of throughput, update frequency and security that’s demanded in and regulated markets,” Nicol said.
Rutter has been and is leveraging his experience of founding multiple companies to advising Nicol on how to start a new company from the ground.
The LedgerEdge Ecosystem
(07:08) The LedgerEdge ecosystem is how the company describes the new ecosystem it is building with its core product. LedgerEdge allows any two users to interact with each other on a peer-to-peer basis, through nodes in a DLT framework. This means one user can search the market for liquidity, for trading opportunities, can find a match with someone else on the other side of the market, can engage with that person and get a trade done all without giving up ownership of the information that they bring into the market. LedgerEdge sets a framework where users own and control the data on their nodes, which sits in volts, which LedgeEdger, the market operator doesn’t see, monetize or take. Users then engage with each other through all the same protocols that they know and love today, searching, click-to-trade, negotiations, and all the ways that bond traders interact today.
(08:09) LedgerEdge also makes it possible for users to execute a trade on a regulated venue by using the very best benefits of blockchain and DLT, as well as making it a fit for purpose and resilient for regulated institutional markets. Um, it’s, uh, focused primarily on corporate credit as an asset class.
(08:24) LedgerEdge is focused primarily on corporate credit as an asset class. These are bonds that are issued by companies and then traded between asset managers and banks in the secondary market. LedgerEdge has particularly focused on this market because it is a large market where illiquidity is a painful problem for all users and where the benefits to having a better way to move assets around the system can have an outsized positive impact on the market, David believes.
(08:50) “When we deliver this, which again, will be launching in of this year, we hope to see many banks and asset managers using it. We’ll look at proving the model out in corporate credit first, and then in the future, we’ll look at other asset classes as well, including other digital assets as those come to the fore,” David added.
The problems of the Corporate Bond Market
(09:50) LedgeEdger sees a lot of inefficiencies in the corporate bond market it is hoping to solve.
“When apple issues a stock, there’s only one type of share in one apple, share. It’s the same as another apple share, avoiding some other complexities around share classes and special considerations on the whole. That’s the way it works. In corporate credit, Apple may issue debt once, twice, three times a year, and so many different bonds are outstanding for every company in the world, which means that while there may be only a few hundred thousand stocks in the world, there are millions of bonds in the world. Now, the variety and the volume of assets in the corporate bond market, make it an illiquid market on the whole, because if you’re looking for one particular asset, I might be looking to sell a different one. And even though we have nearly the same interests we don’t meet,” David explained.
This incumbent problem is made worse by the fact price moves against users immediately when initiating a trade because they put their order out there on the market. Everyone sees it and, and immediately the price moves against them because it’s so illiquid that when someone comes out with an interest in a particular direction, in a particular asset, the market quickly realizes that it’s all moving in one direction.
Alternatively, users have the option to get on the phone or get on a chat message to find someone who can buy or sell the asset that they’re interested in using less technical means. While that can work well at times, it takes lots of time and effort so it may be only worth it for the very largest trades.
(11:41) “There has to be something in the middle, and this is where LedgerEdge comes in. We want to solve the problem of users holding back information. We want to give them the ability to share more information with the market, but only with parts of the market that they want to see that information,” David added.
(11:54) Likewise, LedgerEdge would give users ownership and control of that information so that they know their data isn’t being taken and resold elsewhere.
“We think that this 1-2 solution will be the next generation of technology that supports the bond market because it’s not to say that there are no electronic venues in the bond market. Today over just over 30% of trades, go over electronic venues that aren’t in the US market. And some of the largest electronic venues in the market have done a really good job of moving everyone into a more digital future. However, they’re all using technology that is 10 or 20 years old, and it all centralizes data and liquidity in one single point owned by the market operator. What we’re doing is we’re distributing that information, decentralizing that control and giving users full ownership of what they bring into the market. And this is really why it’s DeFi for institutional and regulated use cases,” David added.
(13:36) In the complex trade market in which LedgerEdge exists, an understanding of the sides of the market is very important to effective collaboration, from the buy-side, sell-side, new liquidity providers like non-bank liquidity providers, ETF, market makers, and more algo-driven tech-focused firms.
“What we did when we started LedgerEdges was we put the design into place, and then we took it out to the sell-side first, because we think that market structure is really important. And it is still the case in most trades today that the sell-side is on one side or two sides of a trade. And we don’t see this changing. We think that the nature of banks as service providers to their customers is such that they have better data and better talent than perhaps anyone else in the market. Now, I think there’s healthy competition there….but truly it is the sell-side that today accepts most of the trades from the market and then pushes the assets back out, and it’s that cycle that we think will continue,” David elaborated.
LedgerEdge’s collaborative process started with working groups on the sell-side, where it ran four working groups with 18 different leading global banks.
(14:48) “We reviewed the entire product overview. We asked what would need to change…And they thought it looked great, but they wanted to be able to stream prices directly to their customers and trade in a disclosed fashion, as in, not anonymous. So we’ve added that into the product. And we now have tremendous support with the sell-side as a whole,” David said.
(15:10) LedgeEdge then went into working groups at the buy-side, where it worked with 21 leading global asset managers, everyone from the very largest assets under management (AUM) to the more boutique and speciality houses.
“We did the same process with the buy-side…and they said they liked to share their portfolio with the market so that they can see more colour, see more information on the things that they have in their portfolio. So we’ve added that in as well. And we’re now going to market with a really good group of market participants on the buy side, the sell side, and those non-bank liquidity providers,” David added.
LedgerEdge is launching in September and has already onboarded over 20 firms. The company thinks it is important to engage with the market before you spend lots of time and money building a product to understand what the user needs to build for what the user is trying to do.
Future Market For Data
(17:21) Users have finally recognised the power of their data and are being asked by their firms and to value their data as a real core asset of the firm. What LedgerEdge is doing in the data market is, instead of centralizing control of data with the market operator, it is allowing users to share that with others on a bilateral ( peer-to-peer) basis. In the short term, that will be used to help them get trades done.
(18:07) “However, going forward, we’ll be incorporating a data marketplace where the system values the data contribution into the marketplace. It values data extraction from the marketplace and it figures out who are data contributors and who are our data consumers.
(18:25) You can then combine that with analytics on what type of data is the most valuable in a given trading day, in a given trading context, with trading behaviour…What we’ll then do is put an economic model onto that data contribution and consumption such that when users are interacting in the marketplace to get trades done, they will also be thinking of their data as an asset…” David added.
(20:08) Good data and analysis of a particular asset can only be leveraged profitably by one side of a trade, David argues. With declining balance sheets among the sell-side community and with more constricted mandates on the buy side, it increasingly difficult to take advantage of such good data. If users continue to hold back and not share data with the market, the market gets more brittle and it hinders the mobility of assets. By incentivizing the sharing of that data and the contribution of that data into the marketplace with a real economic model, profit-driven motive, LedgerEdge hopes to create a more vibrant ecosystem.
(21:46) LedgerEdge delivers its solution as a hosted model to customers. It uses a distributed ledger technology and the Corda platform to essentially organize data flows and give users identity points in the ecosystem.
(22:10) “We do that to give users that control AND that trust they are asking for, as well as to make the flows of data simpler because we can then organize peer-to-peer data flows quite simply using Corda’s application technology. With Corda, we are planning to use two other pieces of technology,” David said.
LedgerEdge would also artificial intelligence to both score the data contributions and help users find other sides of the trade. That is, it would use artificial intelligence to advise users on how they could improve their order so that they can find a match more easily.
(24:27) Large banks around the world have been trying to create their own fintech companies in a similar arena as LedgerEdge is playing with the likes of Forge from SocGen and Japanese actor, MUFG Bank with a programmatic service.
According to David, these projects are primarily looking at the primary issuance process; the ability for an issuer to connect directly to investors, or to connect to investors through the necessary service providers like banks and legal providers.
(24:49) “We’re different in that Ledgeredge is an ecosystem for the secondary trading market. We’re working primarily with assets that have been issued and those could be both bonds that are outstanding in the market today, as well as those digital assets issued onto blockchain platforms, today, tomorrow and into the future,” David added.
What makes LedgerEdge so compelling is that the company can work with primary issuance parties to work with settlement vendors to allow users to manage their asset through its life cycle, through legacy custody providers or new digital asset service providers.
Targets and Roadmap
(26:53) LedgerEdge would be launching in the UK as a multilateral trading facility in September, as a broker-dealer and likely in ATS in January of next year in the United States. It would then launch in the EU as a multilateral trading facility later in 2022. Those three launches would all allow to trade corporate credit in any of the protocols that are most popular today: click-to-trade streaming, quotes, negotiations, RFQ, etc. LedgerEdge would break ground targeting some tangible and painful problems that the market’s suffering from today including building a better way to do portfolio trading. That will be one of its first releases. It would continue to implement its quantified market activity product in more detailed and nuanced ways over the next year.
(28:22) Beyond that, LedgerEdge has a long-term plan to be the ecosystem for secondary market trading for DLT and blockchain-based assets, continue to develop as DeFi for institutions and regulated markets.
What DeFi For Institutions Mean
(30:02) Unlike traditional DeFi companies, LedgerEdge does not any plans at the moment to issue any cryptocurrency products but intends to take the innovations of DeFi and make them fit for institutional and regulated markets. That means decentralizing control and ownership of information to the users of the marketplace rather than the market operator.
(30:57) “When that client segment that we have becomes more interested in other product types and other asset classes, then we’ll have a very strong framework, a very strong ecosystem to allow users to trade those as well again, with all the same institutional and regulatory requirements satisfied as we have with corporate credit,” David added.