Trading Portals Under Scrutiny By Justice Department

The U.S. Department of Justice (DOJ) is looking into the effect of Internet-based trading portals on competition in the bond and foreign exchange markets. According to a published report, executives from several Wall Street firms have received civil investigative demands (CIDs)-the civil equivalent of a subpoena-from the DOJ. The CIDs concern three electronic bond trading networks-BondBook, BondDesk and Market Axess-and two FX exchanges-Atriax and FXall.

A spokeswoman for the DOJ said, "The Antitrust Division is looking at the competitive effect of certain joint ventures in the online trading industry." She declined to comment further. The comments were made prior to the Bush administration's taking office.

Spokespersons for FXall and Atriax said the exchanges were complying with the DOJ's requests for information.

According to the published report, Deutsche Bank, Morgan Stanley Dean Witter, Merrill Lynch and Citigroup's Salomon Smith Barney division have confirmed that they received inquiries from the DOJ. Each of the firms has an investment in one or more of the online exchanges.

Atriax was created last fall by fifty leading FX banks that account for half of the $1.5 trillion daily FX trading volume. The Atriax platform provides a single point of access to market news and data, aggregated research, online dealing and straight-through processing. Financial markets like stocks, bonds, commodities and FX have moved or are moving toward 24-hour-a-day electronic communications networks (ECNs) that use the Internet to route orders, execute, clear and settle trades, review positions and distribute research. The DOJ is apparently looking at whether the pooling of interests by large Wall Street firms in some of these networks may threaten competition in the financial markets.

"The DOJ can argue that these firms have enough market share to ensure that only the systems they participate in can succeed," said Sang Lee, an analyst with Celent Communications.

However, Lee said that the rise of ECNs in the bond, FX and equities markets did not pose any anticompetitive threat.

"If that were the case, the DOJ should have done this a long time ago, especially on the equities side."

"One difference," he noted, "may be that all these firms combined control a lot of the market share on the FX as well as the bond side."