With barely four years of business under its belt, the online bond and currency industry has earned itself six separate US regulatory probes, one European investigation and the threat of more badgering from Brussels if they get more complaints.
Regulators in the United States, and now in Europe, cannot seem to get enough of the multimillion dollar start-ups which they fear have resorted to unfair practices to eliminate rivals.
Behind the recurring themes are the world`s largest banks, which want to see the online trading systems they are backing pay for themselves. But if they are tilting the playing field to reach profitability more quickly, as some industry sources claim, regulators are bound to notice and indeed have.
The regulatory probes are focusing on the possibility that the banks behind online trading companies - specifically bond trader BrokerTec and currency trader FXall - have allegedly pushed as much business as possible onto their own trading platforms to keep the competition at bay.
"It needs to be an open market place without constraints or they risk the wrath of the regulators," said Andy Nybo, a senior analyst with the information technology research firm TowerGroup.
On Wall Street and in Europe this week, financial institutions faced questions from regulators on allegations yet again that they tried to steer bond and currency trading business to their own online start-up companies and away from long-standing competitors.
The electronic bond broker BrokerTec Global LLC, which is owned by a consortium of 14 big banks, confirmed late Wednesday that it had been subpoenaed by the US Department of Justice`s antitrust division. BrokerTec acts as a middleman on nearly 40 per cent of all trades in the $160 billion per day market of dealers trading US Treasuries between themselves.
On the same day a probe into online currency exchange FXall by European Union and US regulators became public.
FXall and its competitors in the online currency trading market have garnered much a smaller market share than their bond-trading counterparts, though the currency market is several times larger than the US Treasuries arena.
In Brussels on Thursday, an EU official said the Commission had not opened an investigation yet but would consider doing so if it received complaints.
It all started in November 2000, when several banks and market sources revealed the US Justice Department was examining three other e-bond companies and two foreign exchange trading firms for anti-competitive practices.
To be successful, Wall Street backing helps, but being the first company to trade a certain product is far more important.
TradeWeb, one of the oldest players in US online bond trading market, started trading in 1998 and is one of most successful e-bond companies launched so far. BrokerTex started trading in 2000 and FXall went live in 2001.
TradeWeb, like BrokerTec or FXall, is backed by financial powerhouses on Wall Street and in Europe. But unlike BrokerTec or FXall, TradeWeb has not attracted the interest of regulators, according to a company official.
A senior online trading industry executive pointed out that TradeWeb "doesn`t have any contracts, any non-competes, any minimum volume requirements," as is alleged, for example, to exist between the owners of BrokerTec to force traders to use the platform.
"If you have a viable business, it`s going to win because you are offering a service that people want, not because you are making people give volume," he said.
On Wednesday, about $20 billion in US Treasuries changed hands on TradeWeb, or nearly 13 per cent of all US Treasuries traded between dealers and customers.
In the forex market, State Street bank started FX Connect several years before rival systems including FXall, giving it a toehold in that market and a key element to its market-leading position today.